In two weeks the monetary policy committee (MPC) will meet to determine the interest rate — the most keenly awaited and debated rate decision in recent years.
The inflation figure released this week was higher than expected. June’s CPIX (consumer inflation less mortgages) was 11,6% year on year, compared with 10,9% for May; economists had expected it would be around 11,4%. Credit extension numbers also came in higher than expected this week.
These figures suggest a rate hike is almost certain next month, but there are other indicators that the MPC will take into account. Most economists are playing it safe, saying that while rates might not be hiked, they would not stake their pay cheques on it.
Although inflation remains stubbornly above the target range and continues to march upwards, analysts say there are signs that inflation will soon ease, despite the latest numbers. Over the past month the rand has strengthened marginally against the dollar and oil prices have fallen dramatically — by more than 10%. As a result, petrol prices are expected to come down by more than 20c per litre.
Rian le Roux, chief economist at Old Mutual Investment Group (SA), says there are several reasons to hope that inflation will fall in the near future. The growth in food prices at the agricultural level has started to slow down, with price increases close to zero. In addition, the dramatically slowing economy will reign in demand, taking pricing power away from suppliers.
On the negative side, however, Le Roux says wage settlements and substantially higher electricity prices could create a higher inflation number over the next few months.
The good news is that the MPC is forward-looking and will be estimating inflation figures over the next 12 to 18 months, not just the next few. While there is no consensus as to the exact effect that a reweighted inflation basket will have when it is introduced next January, many say that the revised basket will reduce the inflation number. In line with this, many economists are revising their inflation projections for next year downwards.
The higher-than-expected credit figure for June, however, could put a spanner in the works. Analysts expected this number to be around 20,14% year on year, but the actual figure was 20,28%. This is fractionally less than May’s figure of 20,9%, but the decline may not be enough to convince the Reserve Bank that credit is under tight control.
Kevin Lings, an economist at Stanlib, says that while demand for credit is falling, the reduction is modest: given the fragility of consumer activity recently, a bigger fall could have been expected. However, he says that the higher inflation levels could be affecting the credit numbers and that real credit growth, taking inflation into account, is slowing more dramatically. Lings says private-sector credit is now growing at only about 8% year on year in real terms, well down from the recent peak of 20,8% in February 2007. During that time inflation has risen from 5,7% to 11,7%.
Lings says that new applications for credit have fallen substantially and that a lot of the growth in credit is coming from existing facilities rather than applications for new ones. This could indicate stressed borrowing as people make use of existing credit lines to see them through these difficult economic conditions.
Lings says that rates might stay as they are in August but that the MPC meeting will be hotly debated. One thing is sure: if the committee decides not to raise rates, it will immediately improve market sentiment and consumer confidence.
Doret Els, an economist at the Efficient Group, says that inflation is expected to peak at 13% in September and slowly subside thereafter. She says that any interest rate hike in August will have little effect on this inflation pattern and therefore expects rates to remain unchanged this month.