Inflation, economy holds key to rates

RISING consumer inflation and a weak economy will be on the minds of the members of the monetary policy committee (MPC) of the Reserve Bank as they decide on the direction of rates today.

The annual headline consumer price index (CPI) inflation rose to 4.5 percent last month from 4 percent in March, lower than consensus forecasts of 4.6 percent, Statistics SA said yesterday.

On the other hand, annual retail sales growth slowed to 2 percent in March from a revised 3.7 percent in February, according to a Stats SA release.

With these figures in mind, Reserve Bank governor Lesetja Kganyago will announce the bank’s MPC’s decision after 3pm today.

Core inflation was slower at 5.6 percent from 5.7 percent, and at 0.3 percent month on month from 1.1 percent.

On a month-on-month basis, prices were up 0.9 percent last month compared with 1.4 percent in March.

The increase in CPI in April was on the large hike in the petrol price, as well as a rise in fuel and Road Accident Fund (RAF) levies in the Budget.

Annabel Bishop, the chief economist at Investec, said June was currently on track for a petrol price rise of about 50c a litre, which would contribute to higher monthly inflationary pressures.

She said CPI inflation was likely to rise for the rest of the year, and average about 6.5 percent year on year in the first quarter of 2016 on the statistical base effects generated by CPI inflation reaching a low point this year of 4.1 percent year on year for the first quarter.

Outlook

There was general economic consensus the MPC would keep interest rates on hold today, Bishop said.

“While slightly lower interest rates will not meaningfully stimulate economic growth because of the supply-side constraints experienced in the economy (notably electricity), high interest rates would negatively impact on the interestrate sensitive services sector of the economy, which will be the driver of economic growth in 2015 and 2016.”

Moody’s said on Tuesday the MPC might be pressured to raise interest rates at the same time as the US Federal Reserve moved to tighten policy in September. Kristin Lindow, a senior vice-president, said in an interview on Bloomberg TV: “If it were to raise interest rates in September, which now seems to be the consensus for the next date, that would put pressure on South Africa to raise rates as well.”

Nedbank economists Dennis Dykes and Johannes Khosa said that the annual retail sales growth of 2 percent in March confirmed that consumer spending, a major component of economic growth, remained subdued in the first quarter of the year.

Other recent indicators also show underlying economic conditions are still relatively weak.