'No rate cuts after Thursday'

Johannesburg - Stubbornly high consumer inflation may mean that Thursday's widely expected interest rate cut will be the last this year.

The country's consumer price index (CPI) rose 8% in May 2009, compared to the same month last year. CPI increased 8.4% year-on-year in April 2009.

"We should have seen inflation quite a bit lower," said Chris Hart, economist at Investment Solutions. "The ability to cut rates further will be very difficult."

Hart added there's a possibility of a rate hike early next year.

"Inflation is certainly not in a good place," said Mike Schüssler, economist at Economists.co.za. "This is not good news for bonds or for rates."

Economists say CPI's stickiness at high levels and further prospects of rising prices paint a grim outlook of inflation for the remainder of the year.

Tariff hikes from state power utility Eskom will come into effect later in 2009. Eskom will hear on Thursday from the National Energy Regulator whether it may increase prices by a requested 34%.

Schüssler said he doesn't expect to see CPI within the 3% to 6% target band for at least a year. He added that oil prices could pose an additional threat to inflation, because they are expected to tick up towards the end of 2009.

"I do suspect by this time next year there could be talk of a hike," said Schüssler. "We could see a small hike around the 2010 World Cup."

However, some economists believe inflation will continue to fall.

"Data still show that the inflation profile is coming down," said Standard Bank economist Danalee van Dyk.

Nedbank's view is that CPI will touch the top band of the inflation target in the fourth quarter of 2009, an estimate that takes a 24% increase in Eskom tariffs into account.

However, Nedbank economist Carmen Altenkirch said a higher Eskom price hike and increased administrative and municipal costs could throw the forecast off kilter.

- Fin24.com