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Inflation respite raises hope of steady rates

The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

The Reserve Bank began a rate-hiking cycle in January that it said would be gradual because of weak economic growth. Despite June’s inflation rate being slightly better than forecast, it remained well above the 3%-6% Reserve Bank’s target band for a fourth consecutive month.

Poor economic growth was one of the reasons the Bank raised interest rates a moderate 25 basis points as opposed to the 50 basis points employed in January.

High inflation and rising interest rates are among factors eroding consumers’ buying power.

The consumer price index (CPI), a measure of consumer inflation, rose 0.3% last month compared with May, and was up 6.6% from a year ago, according to Statistics South Africa data on Wednesday. This was against market consensus expectation of 6.7%.

CPI also increased 6.6% year on year in May.

Increases in housing rentals, owners’ equivalent rent and domestic workers’ wages, pushed price levels higher between May and last month. The increases were offset by a 22c/l petrol price drop last month.

Standard Chartered head of Africa Research Razia Khan said that with the Bank recently having raised rates despite weak economic growth, there would be “little pressure” to hike again in the near term. This was unless there was a “much more pronounced” weakness in the rand.

But HSBC SA economist David Faulkner expected the Bank to again raise rates 25 basis points in September, given the fact that the risks of inflation rising still existed.

Core inflation — which excludes food, petrol and electricity — increased slightly to 5.6% after three consecutive months of remaining unchanged at 5.5%.

Food and nonalcoholic beverage prices were one of the main welcomed surprises in the latest inflation data as they did not increase as much as expected.

But there had been concern that the weakness in the local currency had not yet been fully reflected in food prices.

Barclays Africa economists said trends in food prices suggested that sharply weaker crop prices were beginning to benefit consumer food price inflation. Drought-related pressures pushed food prices higher over the past few months.

If the rand maintained current levels, the inflation outlook could improve later in the year, the economists said.

The rand on Wednesday touched R10.49/$, its strongest level in about seven weeks amid higher investor appetite for emerging market assets. Further, hopes of the wage strike in the steel and engineering industry ending bolstered sentiment.

Should the rand’s strength persist, it would be a “bigger reason” for the Bank to change its inflation forecast, Investec chief economist Annabel Bishop said.

The Bank forecasts inflation to average 6.3% this year, 5.9% in the next and 5.6% in 2016.

Though some economists expected the 6.6% inflation to have been a peak, others said it could rise further before coming down in the fourth quarter of the year.

Capital Economics Africa economist Shilan Shah expects inflation to increase to 7% year on year in coming months and only begin to fall in the fourth quarter. This would be because of the “lagged effect” of a weaker rand.

The effect of the weaker rand, which makes imported commodities more expensive, was not expected to be as pronounced on food prices as previously expected.

Barclays Africa economists expected food price inflation to peak at just more than 9% this month and to slow down markedly towards the year-end. “However, risks that it could be lower and that the disinflation could be faster than we expect have ratcheted up,” they said in a note.

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