/ 28 February 2008

Inflation surge boosts rate-hike chances

South Africa’s consumer inflation, which jumped unexpectedly in January, raised the risk of further monetary tightening despite worries over slowing economic growth.

Statistics South Africa said on Wednesday that targeted CPIX (consumer inflation less mortgage costs) stood at 8,8% year-on-year in January compared with 8,6% in December, while the all-items consumer price index (CPI) rose by 9,3%, compared with 9% in December.

The CPIX number beat forecasts of an 8,4% rise and was widely expected to rise further in the first quarter of 2008, adding to pressure on the Reserve Bank to lift rates again.

”This confirms that inflation remains a very big problem. It is putting serious pressure on the Reserve Bank,” said Efficient Group economist Fanie Joubert.

”We know they left the rates unchanged in January, but given these levels and the rate at which inflation is rising, I don’t know what the Reserve Bank is going to do. [It needs to] tell people why they are not raising [rates] if they are not going to hike again,” he said.

The central bank’s monetary policy committee (MPC) left its key repo rate unchanged at 11% in January, after 400 basis points worth of hikes since June 2006, amid concerns that monetary tightening was becoming overdone and weighing on economic expansion.

The CPIX gauge, which strips out mortgage costs, broke above the upper end of the central bank’s 3% to 6% band in April 2007 — for the first time since August 2003 — and has since remained outside the band.

Rate hike possible

”There is an increasing chance of a 50 basis point hike at the April MPC meeting as inflation continues to climb faster than expected and the period in which it is expected to be back within target is pushed further out,” said Investec economist Annabel Bishop.

The Reserve Bank has in the past partly blamed rising inflation on high consumer spending, which has pushed household debt to a record 77,5% of disposable income, although there is evidence this slowed in response to higher rates.

Rising food and fuel prices remain a concern, though, with domestic fuel costs seen surging to new record high.

Preliminary figures from the Minerals and Energy Department show the petrol price might go up by as much as 7,5% in March, after rising by 2,3% in February.

”The ‘normal’ trajectory for inflation, still strong food and fuel pressures, recent rand weakness, and the prospect of larger electricity tariff increases are all going to contribute to higher inflation in the months ahead,” said London-based Standard Chartered economist Razia Khan.

The rand is sharply weaker so far this year, despite rebounding from lows touched last week, pointing to pressure on imported inflation.

The currency initially weakened on inflation before rebounding. — Reuters