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Johannesburg – Economists do not think that the increase in Consumer Price Inflation (CPI) for June 2016, to 6.3%, will sway the Monitory Policy Committee’s (MPC) rate decision on Thursday.
According to data from Statistics South Africa (StatsSA), prices for June 2016 increased on average by 0.6%, since May 2016. But economists believe the South African Reserve Bank (Sarb) will keep rates on hold, given the weak domestic growth outlook.
“While inflation remains above target, we expect the MPC to be more tolerant of the breach in light of recent rand strength, a lower oil price (August fuel price relief), and expectations of easing food inflation pressure,” according to a statement by Jason Muscat, FNB Senior Industry Analyst.
In 2015, the Sarb increased interest rates in response to concerns about inflation. This was followed by further hikes of 75 base percentage points in 2016. The Sarb has been ahead of the curve, by hiking rates by 200 base percentage points so far, explained Kevin Lings, chief economist at Stanlib.
“The rand has done quite well, a lot of money has come into South Africa. There have been significant foreign direct investment inflows in the second quarter of the year,” said Lings.
The Sarb has significant “breathing space” to be more flexible to judge how the next few months will unfold, he explained.
With the weak growth environment, confidence levels about the economy are sensitive. The outcome of municipal elections could also indicate consumer confidence levels. Initially when the Sarb introduced rate hikes in 2015, it was in response to global market expectations. Currently, monetary policy easing in some developed markets is expected. “There is not a lot of international pressure to hike rates,” said Lings. “The Sarb can afford to keep rates on hold.”
Although there is a low probability that rates will be hiked, a further interest hike of 25 basis points cannot be ruled out before year end, said Sanisha Packirisamy, economist at Momentum Investments.
June inflation was lower than FNB’s forecast of 6.4%. Generally, inflation has been below expected levels, except for June when it was in line with market expectations, said Lings.
Headline CPI in line with market expectations
Food inflation is the “main culprit” in keeping inflation above the Sarb target of 6%. A better agricultural season in 2017 is expected and this should see food prices come down later in the year, according to FNB.
Food prices were up 11% over the past year, up from 10.8% reported in May, according to Lings. Food prices are expected to increase in coming months due to recent drought conditions. “The lag between last year’s drought will impact food prices,” said Packirisamy.
The shortfall in maize will impact food inflation in coming months too. This will mainly impact lower income earners, as it makes up 35% of their consumer basket, explained Packirisamy. The currency weakness in previous months is yet to feed into the consumer basket. Also, businesses are expected to put up prices of goods and services in anticipation of the outcome of wage negotiations.
Transport prices increased to 0.2%, mostly due to the 52 cents per litre increase in the petrol price and a 5.1% hike in air fares, according to StatsSA. The petrol price is expected to drop, around 90c per litre in August, said Lings. This will also help offset pressure from the electricity and water price increases.
However, this relief from lower fuel prices won’t impact low income earners, who depend mostly on public transport, as much as they will higher income earners. Petrol takes up a higher share of high income earners’ consumer basket, said Packirisamy.
Upper income earners more exposed to the change in petrol price
