South Africa’s worse-than-expected consumer inflation data released shortly after the Reserve Bank released equally bad private sector credit extension data on Wednesday has increased expectations of more rate hikes to come.
Inflation has been rising steadily over the second and third quarters of 2006, a development which has prompted the Reserve Bank to become far more hawkish regarding interest rate policy than they were in the first quarter.
July’s inflation numbers will reinforce sentiment that the Reserve Bank is very likely to hike rates again by 50 basis points in October, and will increase expectations of another rate increase in December,” said researchers RLJP.
The market had priced in a CPI figure unchanged from June of 4,9%, while it had expected CPIX to moderate only slightly to 4,7% after June’s 4,8%. In the event, headline inflation (CPI) came in at 5% and CPIX at 4,9%.
RLJP said that private sector credit extension continued to grow rampantly in July at 24,68% year-on-year from a revised 23,85% — and coupled with July’s CPIX would confirm to the Reserve Bank that they were justified in raising rates in August, as well as reinforce sentiment of a 50 basis point hike in October and increase expectations of another rate increase in December.
July’s CPI increase was seen to be the result of higher oil prices and a weaker rand feeding into highly inelastic petrol demand, as well as high food price growth resulting from poor agricultural output precipitated specifically by very low field crop output and higher electricity costs.
“Agricultural output declined by 33% (q/q annualised) in the second quarter of 2006. Rising food prices continue to put pressure disproportionately on the poor, many of whom spend over 50% of their disposable incomes on food,” said RLJP.
Group economist from Standard Bank, Goolam Ballim, added his voice to the view that Wednesday’s results would add gravitas to the central bank’s hawkish tone.
“The modest softening in the CPIX and core inflation rates that we had pencilled in was derailed by a surge in electricity prices, which recorded the highest inflation rate [on a month-on-month basis] since August 1992,” said Ballim.
“The data lend further support to the expectation that inflation will continue to rise towards the first half of next year. Consequently, two more interest rate hikes of 50 basis points each are still on the cards,” concluded Ballim.
Investec economist Annabel Bishop also highlighted the high output costs as well as the impact of food going forward.
“Annual CPIX inflation edged up due chiefly to price pressure from food, transport, housing and fuel and power costs, the latter two categories exhibiting unexpectedly strong inflationary pressure,” she said.
“Both increases in property rates and taxes and higher rentals contributed to the rise in housing costs, while the winter effect of higher electricity prices drove up inflation in the fuel and power category,” said Bishop.
She added that petrol prices rose by 31c/litre in August, but said this looked likely to be reversed by a price cut of over 30c/litre in September.
However, she said domestic food price pressures were expected to continue exerting upward pressure in the remainder of the year.
“The worse than expected CPIX figure increases the chance of a 50 basis point hike at the October MPC meeting. Depending on the outcome of the data between now and the end of September, we may alter our current interest rate view [that interest rates will remain unchanged for the rest of this year] to one of an October 50 basis point hike,” concluded Bishop.
Forward rate agreements are now expected to start pricing in greater rates above the JIBAR, as expectations of a fourth rate hike in the cycle in either December or February intensify.
The PPI numbers to be released on Thursday are now set to provide the market with clues for CPIX inflation in August and September. The increase in South Africa’s producer price index (PPI) is expected to have risen to 7,5% year-on-year in July, unchanged from the surprise 7,5% increase in June, a survey of 12 economists by I-Net Bridge has found. – I-Net Bridge