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Johannesburg - International analysts Moody's Economy.com stated on Friday morning that given still-high consumer and producer inflation, the SA Reserve Bank (SARB) is likely to raise rates by 50 basis points to 10% at its meeting on August 16.
This will take the prime overdraft rate to 13.5% and the current tightening cycle that began in June last year to 300 basis points.
"Although further monetary tightening will do little to curb food or fuel prices, higher interest rates should help the upswing in price growth from becoming entrenched in inflation expectations," said Dr Ruth Stroppiana, lead SA researcher from Moody's Economy.com.
Stroppiana pointed out that "as widely anticipated", annual inflation remained above the SARB's 3% to 6% target for the third straight month in June, coming in at 6.4% on a year-ago basis and in line with May's rise.
"Consumer price inflation continues to be underpinned by broad-based price pressures, including lofty food and fuel prices. Food, which makes up about a third of the CPIX basket, continued to accelerate in June, surging 1.0% quarter-on-quarter (q/q) and 9.5% year-on-year (y/y).
On a positive note, annual core inflation, which excludes volatile food prices, nudged lower during the month, coming in at 5.7% following a 6.0% rise in May," she added.
"Meanwhile, factory gate prices also remain at elevated levels. Although annualised growth in the producer price index eased to 10.4% in June, from 11.3% in the previous month, this is primarily thanks to technical factors; in month-on-month terms prices jumped 2.1%.
Persistently elevated oil prices are a key upward pressure on the measure, and we expect ongoing pass-through to consumer prices," stated Stroppiana.
She concluded that the underlying strength of the economy, combined with the recent 7.5% wage settlement with civil servants and strong levels of consumer spending, would continue to fan inflation in the second half of the year.
Stroppiana concluded: "Yet although the inflation outlook has deteriorated in recent months, we do not expect an outbreak of runaway price growth; central bank tightening and a strong currency will temper increases.
"We expect inflation to continue to hover at the upper edge of the central bank's target range in coming months, before decelerating through 2008 as food and fuel prices ease."