Inflation rises to 5.4%, surprising markets

South Africa's inflation rate rose less than economists predicted in December as growth in food prices eased, reducing investors' expectations of an interest rate increase this year.

Inflation accelerated to 5.4%  from 5.3% in November, the Pretoria-based statistics office said. The median estimate of 23 economists in a Bloomberg survey was 5.6%. Prices rose 0.3% in the month.

The rand's 22% slump against the dollar since the beginning of last year, the worst performance among 16 major currencies tracked by Bloomberg, is adding to pressure on inflation and threatening the central bank’s 3% to 6% target.

The easing in food prices last month may give the bank room to postpone raising borrowing costs.

"Interest rates should stay unchanged for at least the next six to nine months, unless the rand drastically slides further," Elize Kruger, an economist at KADD Capital, said. "Economic growth is still very flat, but the price side is becoming more of a worry."

One-year interest-rate swaps, used to lock in borrowing costs over the period, dropped 10 basis points to 5.69% after Thursday's data. The rand fell less than 0.1% to 10.8286 against the dollar as of 11.14am in Johannesburg.

The Reserve Bank will probably keep its benchmark rate unchanged at 5% next week, according to all 17 economists surveyed by Bloomberg.

Maize prices
Food prices, which account for 14% of the inflation basket, rose 3.5% in December from a year ago, down from 3.8% in November, Statistics South Africa said. It declined 0.1% in the month.

"This is possibly one of the last positive effects from food prices as the sharp increases in corn prices and the weakening of the rand will start to show," Kruger said.

The core inflation rate, which excludes food, non-alcoholic beverages, gasoline and energy costs, was unchanged at 5.3% in December. The median estimate of 12 economists surveyed by Bloomberg was 5.4%. – Bloomberg

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