While a higher inflation rate may otherwise inspire increased hawkishness in the South African Reserve Bank’s monetary policy committee — which meets this week — analysts expect that the repo rate will be kept on hold again. (Delwyn Verasamy/M&G)
As was expected, following four consecutive declines, inflation ticked up slightly in August.
According to data from Statistics South Africa, consumer inflation accelerated to 4.8% year-on-year in August from 4.7% in July, after a rise in fuel prices and increases in municipal tariffs. But food price inflation continued to ease, from 9.9% year-on-year in July to 8% in August, taking some of the edge off.
Analysts were expecting a slight rise in inflation in August, as a result of base effects. Inflation’s downward trend began in August last year. Moreover, the petrol price rose by 37 cents a litre in early August. Diesel was up by about 70 cents a litre.
While a higher inflation rate may otherwise inspire increased hawkishness in the South African Reserve Bank’s monetary policy committee — which meets this week — analysts expect that the repo rate will be kept on hold again.
Investec chief economist Annabel Bishop said that though this outcome is widely expected, the risk of a 25 basis point hike remains. This is after the United States Federal Reserve opted to raise its benchmark interest rate by 25 basis points in July.
South Africa’s interest rates have remained unchanged since May after a 50 basis-point hike in that month, while the Fed hiked by 25 basis points in both May and July, Bishop noted. “The US has seen more monetary policy meetings in its interest rate hike cycle than SA, raising its bank rate by 5.25% in total, versus SA’s 4.75%,” she added.
“While this would indicate room for a further interest rate hike, of up to 50 basis points, inflation in SA has dropped rapidly, while inflation is likely to average close to 4.5% year-on-year next year, indicating no need for a hike.”
The Fed will announce its September policy rate decision on Wednesday, a day ahead of the MPC. Bishop expects hawkishness from both central banks “as they seek to influence inflation expectations, and so consumer actions, by implying more interest rate hikes could be likely”.
The Bureau for Economic Research (BER) expects an on-hold Fed decision, given that several policymakers there have recently indicated that they do not see the need for a further hike at this stage.
The BER expects that the MPC will look past an expected near-term bump higher in inflation, keeping the repo rate unchanged at a restrictive 8.25%. The MPC is likely to highlight the upside risks to inflation, specifically the oil price and weaker rand, the bureau said.
The rand has hovered near R19 to the US dollar so far this week. This is as markets continue to worry about the deterioration in South Africa’s public finances, according to Bishop.