Consumer inflation has breached the Reserve Bank’s upper limit for the first time in 44 months, upping pressure for an interest rate hike next week, and sending the JSE plummeting.
CPIX, which is the main consumer inflation indicator, reached 6,3% year-on-year in April, according to figures released recently, while headline CPI reached 7% year on year. CPIX prices rose 1,2% between March and April, and CPI rose 1,3% for the same period, mostly due to higher food and transport costs. Thanks to a 68c/litre hike in the petrol price, transport inflation rose to 7,6% year on year. Prices for grain, meat, dairy, vegetable, and sugar all rose, leading to a 8,6% rise in overall food prices year on year. Food and transport inflation are likely to continue to rise.
A dealer said the JSE opened weak on Wednesday, as world markets were hit by trebled stamp duty in China, but that worse than expected CPIX figures had added to its woes. The inflation data sparked a sell-off in the rand, now trading at a two-month low against the dollar of R7,19. Fears of a rate hike next week put pressure on banking and retail stocks, but resources were helped by the softer rand. The All-Share index closed 0,79% on the day, at 28 439 points.
The latest inflation figures have left market analysts reeling, and a hike in interest rates next week looks more likely than ever, said Nedbank economist Dennis Dykes and Stanlib economist Kevin Lings. The market expectation was for a CPIX increase of 5,9% and a 6,5% increase in CPI, according to Nedbank’s economic comment.
Seasonally adjusted real GDP growth slowed slightly in the first quarter of this year, to 4,7%, quarter on quarter, down from 5,6% in the fourth quarter of last year. Economist Dawie Roodt of the Efficient Group said the only sector that contracted for this period was mining, despite sky-high commodity prices. Weaker GDP figures reduce the chances of an interest rate hike next week, as it suggests that the economy is not overheating.
But Roodt was disappointed that the Bank had failed to hike rates at its last meeting, as the stated inflation target had now been breached. “They expected inflation to go up, but they didn’t do anything. It sends a message that they are soft on inflation, and it’s the first time in a long time that I feel they’ve made a policy error.”
Dykes said last year’s four consecutive rate hikes had already started to affect consumer spending, with slowing vehicle sales and softer GDP growth. “This will ease some of the pressure on the Reserve Bank to tighten monetary policy. We expect that rates will remain unchanged during the remainder of 2007, but acknowledge the increased risk of a rate rise in the short term,” he said.
“South Africa’s consumer inflation has been remarkably well contained over the past few years, especially given the strong economic growth, strong growth in money supply, high oil price, and high commodity prices,” Lings said. But transport, rent, wages and materials have all risen, and there is a “significant risk” that inflation will remain high. He said he expected CPIX to end the year at around 6,3% year on year.