/ 19 December 2007

SA inflation jumps, backs rate rise

South African consumer inflation raced further away from the central bank’s band in November, backing the case for another interest rate rise, despite a slowdown in retail sales.

The targeted CPIX gauge — which strips out mortgage costs — jumped to 7,9% year-on-year from 7,3% in October.

The rise was the fastest since April 2003 and widened the gap from the central bank’s 3% to 6% band.

The Reserve Bank has tried in vain to tame inflation, hiking its repo lending rate by 400 basis points to 11% since June last year.

Although the increase was largely due to rising food costs — a driver out of the direct control of monetary policy — the bank may be forced to act again to curb inflation expectations, in spite of signs consumer spending may be cooling.

”Exactly as we expected, another big jump from the previous month. It tells us that the inflationary pressure is still very strong and rising strongly,” Efficient Research economist Fanie Joubert said on Wednesday.

”The probability of another interest rate hike in January is very good.”

The number came in roughly in line with expectations of an 7,8% increase, but it already exceeds the central bank’s forecasted peak of 7,8% predicted for February next year.

Stats South Africa also said the all-items consumer price index increased by an annual rate of 8,4% — on the consensus forecast — compared to 7,9% in October.

Market reaction was muted, with the rand little changed at 6,8975 to the dollar at 11.10am GMT, while the benchmark 2015 bond yield ticked up one basis point to 8,545% from shortly before the data was released.

Cooling spending

The deteriorating inflation outlook comes amid evidence consumer spending, a big impetus for strong economic growth over the past three years, may be slowing.

South African retail sales growth, released earlier on Wednesday, slowed for the second consecutive month to 1,5% year-on-year in October, pointing to easing household demand as higher interest rates bite.

Reserve Bank Governor Tito Mboweni said earlier this month there were tentative signs consumers were responding to the previous rate increases, highlighted by a sharp fall in year-on-year new vehicle sales.

But the slowdown may not be enough to ward off another rate increase at the bank’s policy committee meeting on January 30 and 31.

”South Africa CPIX surprises to the upside once again, in what is supposed to be a quiet survey month,” said Razia Khan, regional head of research at Standard Chartered in London.

”This already calls into question the SARB’s forecasts of where CPIX will peak. Even the weakening macro picture, evidenced by this morning’s weak retail sales, will matter less.”

Stats SA said food inflation climbed to 13,4% year-on-year, continuing its upward trend. Energy prices are also expected to remain key pressures for inflation after a 6% jump in domestic fuel prices in December.

”It doesn’t deter the fact that they [inflation] could rise even further by the time the next set of figures comes out … I think price pressures are strongly evident in this economy,” Russell Lamberti, economist at independent market analysts ETM, said.

Mike Schüssler, economist at T-Sec, said the figure was above expectations, and this would increase the risk of a further interest-rate hike.

”By no means is the inflation trajectory over, inflation will go well over 8% in December.”

Nicky Weimar, economist at Nedbank, said the figure was in line with expectations.

”Unfortunately, it is an ugly number and we all know that it is going to get worse before it gets better.

”Going forward, the outlook for interest rates will depend on the economy, and if there is clear evidence that consumer spending is slowing then the [South African Reserve Bank] will have reason to pause.”

Ridle Marcus, economist at Absa, said he number for December would be important for policy purposes and that CPIX would probably come in around 8,5% in December.

”This will be the number that will be considered by the MPC at the end of January. I still expect CPIX inflation to peak in February 2008.”

Annabel Bishop, an economist at Investec Group, said the chief driver was, once again, the increase in food-price inflation.

”CPIX inflation is likely to only fall back within the inflation target range toward the end of 2008, peaking close to 9% y/y at the end of Q1,08. There is now a greatly increased chance of a 50bp hike at the January 2008 MPC meeting.” – Reuters