Producer inflation under pressure
• Fuel increases and weaker rand make interest rate cut unlikely
With another fuel price increase expected to be announced on Friday, producer inflation will continue to increase, quashing any hopes for another interest rate cut in 2018.
Producer inflation ticked up to 4.6% in May from 4.4% in April on the back of two consecutive months of fuel increases.
The Automobile Association (AA) released its fuel price outlook for July on Thursday with expectations of petrol prices to rise by 26c a litre in July‚ diesel by 24c and illuminating paraffin by 20c.
The price of oil and the rand’s value against the US dollar were primary factors that influenced the fuel price.
At the last meeting of the Monetary Policy Committee (MPC) in May, Reserve Bank governor Lesetja Kganyago mentioned these as risks to the inflation outlook.
“Further hefty fuel price increases in June and July due to the recent increase in global oil prices and a somewhat weaker rand will exert further upward pressure on producer inflation in coming months,” said NKC economist Elize Kruger.
The next MPC decision is on July 19. While the scope for rate cuts seems to have passed, analysts are at odds over whether there will be hikes in 2018.
This comes as the rand is headed to R14 to the dollar, the weakest level since November 2017, before Cyril Ramaphosa took the helm as president.
“Policy makers might welcome the recent [rand] depreciation, which followed an unsustainable rally,” Capital Economics economist John Ashbourne said.
However, Nedbank economist Busisiwe Radebe said the Bank would be reluctant to raise interest rates given the weak economy but may be forced to if the rand does not retrace in the next few weeks.
The rand strengthened against the dollar in December after Ramaphosa became president of the ANC.
In the March meeting, the MPC cut rates and said the rand was overvalued.
However, policy makers have turned hawkish in recent months as emerging market jitters and growing concern of a global trade war, fuelled by US China tensions, pushed the local currency weaker.
MONETARY POLICY COMMITTEE SAID IN MARCH THE RAND WAS OVERVALUED