File photo: Reuters

Johannesburg - The monetary policy committee (MPC) of the Reserve Bank should hold the interest rate steady at its meeting next week, although consumer inflation edged up to 5.9 percent last month, threatening to breach the 6 percent upper end of the central bank’s target, economists said yesterday.

They were divided on the inflation outlook, but most forecast that the annual rise in the consumer price index (CPI) would breach the 6 percent upper threshold before peaking at around 6.5 percent.

Annabel Bishop, the chief economist at Investec in South Africa, said the bank had already hiked interest rates by 50 basis points this year, and she expected another hike of 50 basis points in July, then no more this year.

She said any more than this would be excessive, given that consumers were highly indebted, at 75 percent of disposable income.

Bishop added that there was a greater sensitivity to higher interest rates currently than historically, and so fewer interest rate hikes would be needed to curb the already modest demand-led inflation that was, well within the inflation target.

Johann Els, a senior economist at Old Mutual Investment Group South Africa, said he expected headline CPI inflation to peak at around 6.5 percent towards mid-year and the annual average to come in at 6 percent. Limited pass-through, a more stable currency and the current weak economy would help limit interest rate increases.

He said: “We also expect another 100 basis points in rate increases this year, with the Reserve Bank potentially skipping some meetings and a few increases potentially coming in at 25 basis points.”

Gina Schoeman at Citi Research said she remained bullish on inflation for the rest of the year and from here on expected a steady rise to a peak of 6.6 percent in June and again in November or December.

She believed that with no upside surprise in yesterday’s CPI print, a steadier currency, a lower fourth-quarter current account deficit last year and gross domestic product (GDP) downgrades among private sector analysts left a dovish undertone to next week’s MPC meeting relative to January’s.

Schoeman said she expected the repo rate to remain unchanged at 5.5 percent next week, but for normalisation to continue in May with another 50 basis points rate hike as inflation expectations would still need to be contained and market signalling remained critical for the rand.

The Nedbank Group Economic Unit said the inflation outlook remained poor in the short term as the rand was still vulnerable despite its recent strengthening.

“However, we believe that the weaker growth picture may convince the MPC to keep rates on hold next week, although there is a possibility of another 50 basis points hike towards mid-year as inflation rises above the target range,” Nedbank said.

It added that pressure for further tightening was likely to ease in the second half when it was thought the rand would stabilise. Thereafter, Nedbank forecast the repo rate would be kept steady until the second half of next year.

Bishop said there was no evidence of second-round pass-through effects from the rand’s earlier depreciation and less evidence of direct inflationary effects from the rand weakness.

“The rand has pulled back from January’s lows and the direct impact on inflation is therefore waning as petrol price increases lessen and commodity prices, including agricultural, moderate,” she said.

Bishop said the petrol price rose by 36c a litre this month, compared with 81c a litre in March last year and this base effect would subdue overall CPI inflation, pulling it down toward the annual 5.5 percent mark in the next print.

She said the petrol price was on course for an 11c a litre cut next month, which was likely to keep consumer inflation close to the 5.5 percent mark in that month, particularly the moderation in maize prices, as good rains broke the drought.

CPI inflation for last month was up from 5.8 percent posted in the previous month. Contributing to the small upward pressure on inflation were food, transport due to petrol price hikes, and health insurance. - Business Report