Economists urge cau­tion on in­ter­est rates

The Star Early Edition - - BUSINESS REPORT -

CAU­TION must still be ap­plied be­fore call­ing the end of the Re­serve Bank’s rate hik­ing cy­cle, said economists yesterday, af­ter the re­lease of the an­nual headline con­sumer in­fla­tion data.

Con­sumer price in­dex (CPI) in­fla­tion ac­cel­er­ated to 6.8 per­cent year-on-year in De­cem­ber – beat­ing mar­ket ex­pec­ta­tions – from 6.6 per­cent in Novem­ber, Sta­tis­tics South Africa (Stat­sSA) said yesterday.

Re­serve Bank Gov­er­nor Le­setja Kganyago con­firmed this when he was asked on Bloomberg TV from Davos in Switzer­land this week on what the bank meant last year when it said we were reaching the end of the tight­en­ing cy­cle.

“We didn’t say we have reached the end of the tight­en­ing. We might be reaching the end of the tight­en­ing cy­cle,” Kganyago said.

On a month-on-month ba­sis, in­fla­tion quick­ened to 0.4 per­cent from 0.3 per­cent pre­vi­ously.

The mon­e­tary pol­icy com­mit­tee (MPC) will meet for two days next week to de­ter­mine the way for­ward on in­ter­est rates.

Core in­fla­tion, which ex­cludes the prices of food, non-al­co­holic bev­er­ages, petrol and en­ergy, rose to 5.9 per­cent year-on-year in De­cem­ber from 5.7 per­cent, and edged higher to 0.5 per­cent on a month-on­month ba­sis from 0.1 per­cent.

Food key driver

The main driv­ers of the in­fla­tion in­crease were food and non-al­co­holic bev­er­ages, hous­ing and util­i­ties, as well as mis­cel­la­neous goods and ser­vices.

Ned­bank said in­fla­tion was ex­pected to re­main above 6 per­cent for the next few months, but to dip within the Re­serve Bank’s tar­get range as food prices came un­der some con­trol as the drought dis­si­pated.

“The lat­est in­fla­tion fig­ures un­der­line the fact that cau­tion must be ap­plied be­fore call­ing the end of the Re­serve Bank’s rate hik­ing cy­cle. While our base­line view is that the next move by the Re­serve Bank is prob­a­bly down, we still ex­pect the MPC to re­main cau­tious, leav­ing rates at cur­rent levels for some time, given the down­side risks posed to the rand by a volatile do­mes­tic land­scape and chang­ing global for­tunes.

It added: “We ex­pect the MPC to start eas­ing mon­e­tary pol­icy in the sec­ond half of the year as in­fla­tion moves into the tar­get band on a more sus­tain­able ba­sis.”

FNB econ­o­mist Mamello Matik­inca said it was the bank’s view that the in­fla­tion fig­ures marked the peak in headline in­fla­tion.

FNB’s primary es­ti­mate for Jan­uary is 6.5 per­cent, bar­ring any sig­nif­i­cant changes fol­low­ing the re­bas­ing of the in­fla­tion bas­ket, which will be pub­lished in Fe­bru­ary.

Matik­inca said she viewed the risks to the in­fla­tion out­look to be on the up­side. “This sug­gests that the Sarb is un­likely to cut the repo rate at any time.”

She added: “While we ex­pect in­fla­tion to fall be­low 6 per­cent this year, the rate of de­cel­er­a­tion will not be as pro­nounced as ini­tially fore­cast, as the im­prove­ment in food prices is ex­pected to be limited by ris­ing meat prices.”

Matik­inca said the sta­bil­i­sa­tion of the rand was ex­pected to mit­i­gate the rise in food prices.

“Fur­ther­more, risks stem­ming from global events could desta­bilise the rand in the months ahead, and could de­ter the ex­pected im­prove­ment of the in­fla­tion rate. As such, we be­lieve the Sarb will opt to keep rates on hold un­til greater clar­ity emerges.”

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