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'No rate change till 2014'

Cape Town - Due to the effect of petrol price hikes on consumer prices, headline consumer inflation breached the ceiling of the South African Reserve Bank's (Sarb's) target band in July.

It overshot market expectations at 6.3% year-on-year, accelerating from 5.5% in June, data from Statistics South Africa showed on Wednesday.

The rand weakened more than 1% against the dollar and government bonds upon release of the data.

In reaction to the news, Nomura International's emerging markets economist Peter Attard Montalto said that the CPI sparked overdone market concern: "Core inflation is on a very slow if steady upward trend and this is what will cause a hike ultimately when the Sarb shifts and starts to see it breaching target in its forecast in 2015, in our view.

"Weak GDP data next week should still keep rates on hold this year too."

CPI inflation, said Montalto, should fall back rapidly in the fourth quarter to average about 5.6% and then slide to a base of 5.4% in March and April next year.

"During this period, however, we think core inflation will continue to rise with the dollar stuck at R10.0 and a difficult wage round this year filtering through."

On the risk of an earlier interest rate increase, Montalto said: "... we reiterate several reasons why we think the Sarb won't hike at the September meeting (or indeed the November one) in our view:

1) Output gap widening in Q2.
2a) Still no core breach in its CPI forecast, headline edging up next year, but no sustained breach in the long run.
2b) It views this CPI move as temporary.
2c) It is still in the zone of seeing risks of CPI pass-through accelerating and wage/inflation spirals, not having made those baselines yet, and unlikely to do so before the end of the wage round.
3) Caution and flexible inflation targeting will make it 'late'."

But Montalto believes this move will reinforce two things - "first, the MPC rhetoric that it is strongly focused on inflation targeting, although being clear that it is very flexible and it has a high tolerance of CPI inflation at the top end of the band in the long run and of temporary breaches.

"This rhetoric may well reinforce the market’s hiking view and so the MPC is getting some implicit, stealth tightening without the politically awkward move of actually hiking yet.

"Second, we think it will reinforce the message that additional rate cuts are not an option, that it is the government’s job to sort the structural issues in the economy not the Sarb, and that the government is currently failing at this task."

Montalto said: "Our baseline remains that rates will be unchanged this year before a first hike in April. However, given how strongly the risks to our CPI inflation forecast are skewed to the upside, the risks of an earlier hike in March or even January are very much there (as opposed to later) even with our very bearish growth view.

"We would currently say there is a 75% chance of a hike in May next year, 40% in March, 25% in January and 20% in November with 10% in September (conditional probabilities on it being the first one).

"The MPC statement is currently on the hawkish side of neutral. We may well see them switch to outright hawkish when its forecast shifts higher still in CPI inflation."



 

 
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