CPI hits highest level in June

South Africa’s targeted consumer inflation quickened to its highest level in 15 months in June, data showed on Wednesday, but this was in line with market expectations and not likely to persuade the Reserve Bank against leaving interest rates unchanged.

CPI quickened to 5% year-on-year in June—bang in line with forecasts—from 4.6% in May, and slowed as expected to 0.4% month-on-month from 0.5%, Statistics South Africa data showed.

Government bonds extended their gains, but traders said this was more in response to the firmer rand on the day, as investor aversion to risk assets abates a little.

The yield on the 2015 bond fell to 7.46%, down 4.5 basis points on the day, from 7.506% prior to the CPI date.

Food inflation remained the main driver of the increase in overall CPI, rising to 7.1% year-on-year from 6.1% in May.

Analysts said the Reserve Bank would most likely still hold its repo rate steady at 5.5% when it concludes a three day policy meeting on Thursday.

“We still expect the MPC to maintain its wait-and-see policy until there is greater evidence of ‘more generalized inflation’, either due to second-round effects from higher commodity prices or price pressures emanating from firmer domestic demand,” Nedbank said.

“Latest statistics on local and international growth have not been encouraging and we would therefore still expect the Reserve Bank ... to delay its first hike until early 2012, as an early interest rate increase would risk curbing the economic recovery.”

The central bank has left its repo rate unchanged at 5.5% this year, after reducing it by 650 basis points in the two years to November 2010 to assist growth after a recession in 2009.

Analysts are still divided on whether the tightening cycle will begin by the end of this year or during the first quarter of 2012, when the Reserve Bank expects a temporary brief of the 3% to 6% target band for CPI.—Reuters

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