Business

Lower inflation increase may mean no repo rate hike

Thalia Holmes

A lower-than-expected inflation increase means there is less chance of a repo rate hike in the next quarter, say analysts.

A lower-than-expected inflation increase means there is less chance of a repo rate hike in the next quarter, say analysts. (Oupa Nkosi, M&G)

The lower-than-expected inflation increase announced on Wednesday means there is less chance of a repo rate hike in the first quarter of next year, say analysts.

The headline consumer price index (CPI) increase in November was 5.3% year on year, which was 0.2 of a percentage point lower than October's rate of 5.5%. It was also lower than what analysts predicted, with most predicting a rate of 5.4% or 5.5%.

"The modest monthly rise in inflation was largely due to an increase in food prices, while the decline in the petrol price at the beginning of November helped to subdue the monthly inflation rate," said chief economist at Stanlib Kevin Lings on Wednesday.

Food prices rose by 0.9% year on year in November. "This is largely due to favourable base effects," said Lings. "Globally, food inflation remains relatively well contained, having declined in recent months. This should help to offset some of the effects of currency weakness."

According to Investec group economist Annabel Bishop, the lower inflation rate means that the Reserve Bank is unlikely to announce an increase in the repo rate next quarter.

Analysts speculated that the central bank could increase the rate at which it lends to commercial banks, following the last Monetary Policy Committee meeting in November, when Reserve Bank governor Gill Marcus said the possibility of a rate hike had been discussed extensively by the committee.

But Bishop said the new data put end to such ideas.

'Economic growth will remain below potential'
"We continue to expect no hike in interest rates next year as CPI inflation will remain within target, economic growth will remain below potential and inflation expectations will subside to reflect this in the new year," she said.

Lings forecasts an average CPI inflation increase of 5.6% year on year in 2014. This will be 0.2 of a percentage point less than his forecast for the current year, where he expects 5.8%.

The projection is higher than last year's average of 5.7% and the flat 5% average of 2011.

But Lings's prediction is highly contingent on the outlook for food inflation and the weaker rand exchange rate.

The South African currency has weakened by 18% against the US dollar over the past year and is the worst-performing among 16 major currencies tracked by Bloomberg. It has lost 22% against the dollar over the past two years, "and yet there is still no sign of the weaker rand leading to higher domestic inflation", said Lings.

"This appears to be largely due to the slowdown in the domestic economy and the inability for companies to pass on cost increase."

Nevertheless, said Lings, there is some upward pressure on domestic agricultural prices. Bad weather conditions in some of the maize production areas, and rising costs of meat were contributing factors.

"Food inflation remains one of the key upside risks to South African consumer inflation in 2014," he said.


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