Justification for interest rate hikes in doubt after CPI data

THE INFLATION rate was almost unchanged in November, suggesting the SA Reserve Bank may have had no real justification to raise interest rates twice this year.

The consumer price index rose to 4.8 percent in November, the highest since July. It accelerated mildly from 4.7 percent in October, according to a survey yesterday by Statistics SA.

The rate was in line with market expectations. Prices rose 0.1 percent in the month.

The rand gained for the first time in five days yesterday, rising 0.1 percent to R14.5363 against the dollar after the inflation report. It had fallen to a record low of R14.7009 to the dollar on Tuesday.

The Reserve Bank has twice hiked the repo rate this year, citing risks to inflation by a marked depreciation of the rand, worsening drought conditions and their likely impasse on food prices, and the possibility of additional electricity tariff adjustments.

It said these have been assessed to outweigh possible downward risks from lower international oil prices and subdued exchange rate passthrough.

Reserve Bank governor Lesetja Kganyago has said the general approach of the Reserve Bank is to see through exogenous shocks and react to second round effects.

The Reserve Bank raised the repo rate in July and November this year in order to protect the weak rand against the strong dollar.

However, some economists have said this is an exercise in futility and evidence to that effect is borne by the fact that the rand has depreciated by 17 percent against the dollar since the rate hike in July.

Bart Stemmet, an analyst at NKC African Economics, said there have not been any marked signs of second-round effects from rising fuel prices or the struggling rand.

Colen Garrow, an economist at Lefika Securities, said: “Forthcoming interest rate decisions have moved away from being data – dependent to rand-dependent as the SARB moves proactively to keep SAUS interest rate differential wide enough to attract capital to finance the burgeoning deficit on the current account of balance of payments, reported at -4.1 percent of gross domestic product for the third quarter in 2015.”

The mild lift in CPI is in line with forecasts by the Reserve Bank, which have remained virtually unchanged, although the bank says the risks to the forecast have increased.

The Reserve Bank has taken a gradual approach to raising interest rates, increasing the benchmark repurchase rate by 1.25 percentage points to 6.25 percent over the past two years. “The Reserve Bank will try to stay one step ahead of the curve,” Stemmet, said yesterday. “Even though the inflation rate is rising very slowly, all the risks to inflation are to the upside.”

The rand’s slump to a record low against the dollar on Tuesday may stoke inflation, which the Reserve Bank forecasts will breach the target band in the first and fourth quarters of next year.

The depreciation of the currency represents a risk for price growth, it said in a report on Tuesday. Core inflation, which excludes food, non-alcoholic beverages, petrol and electricity costs, slowed to 5.1 percent in November, the lowest rate of increase in prices since August 2013.

South Africa’s economy narrowly avoided a second recession in six years in the third quarter and will probably expand at the slowest pace this year since 2009, complicating Kganyago’s task to rein in price growth with monetary policy.

Meanwhile, annual retail sales growth accelerated to 3.3 percent in October from a revised 3 percent in September (previously 2.7 percent) against the market expectation of 2.5 percent. Nedbank said a firm trend was unlikely to be sustained in the months ahead.

It said finances would remain tight due to a weak job market, while fragile consumer confidence would make households more cautious about spending on non-essential goods and services.

“Added to this, debt levels remain high, lending standards tight and debt service costs will rise along with the anticipated interest rate hikes, while inflation – which will be driven by dry conditions and a weaker rand – will erode disposable income and partly offset the benefit of higher wage settlements.” – Additional reporting by Bloomberg