CPI points to rate hike
CONSUMER inflation accelerated in December, making an interest rate hike very likely next week, despite weak overall economic growth.
According to data by Statistics SA yesterday, annual headline consumer inflation rose to 5.2 percent in December, compared with 4.8 percent in November, in line with expectations.
Core inflation, which excludes the prices of food, non-alcoholic beverages, petrol and energy, edged up to 5.2 percent year on year from 5.1 percent in the previous month, while also rising to 0.3 percent month on month.
This may give the Reserve Bank reason to take a more aggressive approach and raise the benchmark rate by more than 25 basis points at its first meeting of the year next week.
Reserve Bank governor Lesetja Kganyago said yesterday that the bank was facing a policy dilemma of slow growth and rising inflation ahead of a decision on interest rates. At its last policy meeting in November, the Reserve Bank said it had forecast that inflation would breach its upper target of 6 percent for two consecutive quarters in 2016 as the ongoing drought pushed up food prices.
“We are starting to see more evidence of building food price pressures in particular, given the local drought conditions, and it will obviously be of concern to the monetary policy committee in its deliberations next week,” Jeffrey Schultz, an economist at BNP Paribas South Africa, said.
Nedbank economists Dennis Dykes and Busisiwe Radebe said that in an an environment with a rapidly deteriorating inflation outlook, the Reserve Bank would have little choice but to raise rates to contain inflationary expectations, and restore financial stability.
“We believe the bank will increase the repo rate by 50 basis points and then hike by the usual 25 basis points in each of the following consecutive meetings.”
Annabel Bishop, the chief economist at Investec in South Africa, said a 50 basis point rise would belie previous assurances by the Reserve Bank that the rate hike cycle would be gradual, and would ignore the collapse in the economic growth outlook and suppress the impact that simultaneous fiscal tightening and higher interest rates have.