Economists urge caution on interest rates

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.”