Inflation ticks up to 6.3%, limiting scope for Reserve Bank to cut rates
Bloomberg and Reuters THE CONSUMER inflation rate rose to an annual 6.3 percent in January, remaining outside the target range for a third month and limiting the space Reserve Bank governor Gill Marcus has to stimulate the economy.
Inflation accelerated from 6.1 percent in December, Statistics SA said on its website yesterday. The median estimate of 10 economists was 6.2 percent.
Prices rose 0.6 percent month on month.
The central bank’s monetary policy committee has kept the benchmark repo rate at 5.5 percent since November 2010. Marcus said last month that the inflation rate would probably remain above the bank’s 3 percent to 6 percent target range this year.
“The Reserve Bank will keep the repo rate steady at 5.5 percent until the first half of 2013,” Adenaan Hardien of Cadiz Asset Management predicted. “We expect a gradual rate hiking cycle thereafter.”
The economy expanded an annualised 1.4 percent in the third quarter of last year, close to a two-year low, as mining and manufacturing contracted. Finance Minister Pravin Gordhan said yesterday that it would probably expand 2.7 percent this year, down from an earlier projection of 3.4 percent.
Nedbank Group said yesterday that rising food, fuel and administered prices, as well as a weaker rand later in the year, would keep inflation “elevated. These stresses will be partly offset by softer domestic spending and excess production capacity.”
While inflation was outside the central bank’s target rate, it was slower than previously expected, Alastair Sellick, the head of fixed interest at PSG Asset Management, said in an interview. “If anything, it gives it more ammunition to cut rates in the future as some people were predicting an inflation rate of 6.7 percent earlier in the year.”
Tebogo Mosepele, an economist at Standard Bank, said despite the rise in inflation the outlook for interest rates remained unchanged. “We reiterate our base case scenario that the SA Reserve Bank will likely keep interest rates on hold this year,” said Mosepele.
The current environment, which could be characterised as “stagflation lite” – where the weak domestic growth outlook coincided with rising inflationary pressures – gave the Reserve Bank less room to move the policy rate.
Nicky Mosepele, a senior economist at Nedbank, said the acceleration in consumer price index (CPI) growth was stronger than expected, but not completely out of control. The numbers did not change the underlying story too much.
“From our perspective, the challenge for the Reserve Bank really remains unchanged. They have to try and negotiate a path for interest rates in which they can provide as much support to the economy – which is still fragile and faces considerable downside risks – and at the same time not allow inflation above 6 percent to get too entrenched.”
Gina Schoeman, a senior economist at Absa Capital, said the CPI rate was not surprising given the upside risks at present. “We think through 2012 we are going to continue to see food prices rising.” Core inflation was gaining momentum as it moved from 3.9 to 4.3 percent.
That was important because the country had seen strong consumption over the past two years and it was not unusual for that to start relating to higher underlying inflation.
“We still think the Reserve Bank is going to be mindful of global growth risks. But we do maintain our view that, come the fourth quarter, if growth holds up at 2.8 percent this year and inflation upside risks continue, we think the bank will be quite comfortable to start normalising rates in the fourth quarter and by that we mean a 50 basis points rate hike.”