Mariam Isa
28 August 2008
Johannesburg — SA's main inflation rate rose to 13% last month, a touch above forecasts, but government bonds rallied on the view that yesterday's figures helped the case for keeping interest rates steady for the rest of the year.
The annual rise in CPIX (headline inflation excluding mortgage costs) accelerated from 11,6% in June, driven by higher electricity, food, fuel and housing costs.
Consensus forecasts had predicted that CPIX - which has now breached the Reserve Bank's 3%-6% target range for 16 months running - would rise 12,9%.
But the slightly higher rise did not shake the view that consumer inflation was close to its peak, and will begin to subside next year, paving the way for cuts in lending rates.
The Bank kept interest rates steady this month, saying CPIX would peak at about 13% in the third quarter, and then start falling "significantly" early next year.
Absa Capital economist Monale Ratsoma said: "For the Bank, the data should be consistent with the recent decision to leave interest rates on hold. It also remains consistent with the view that the next move on rates will be downwards."
Yields on government bonds, which move in the opposite direction to prices, fell as much as 18 basis points on the news while money markets rallied by a few basis points.
Investec economist Annabel Bishop said she expected CPIX to creep above 13% this month, and then ease towards 11% by year-end as fuel prices continued to drop.
"We expect no more interest rate hikes this year, and significant interest rate cuts next year," she said.
Markets are pricing in two percentage points of rate cuts next year. That will reverse part of the cumulative rise of five percentage points between June 2006 and June this year, which has sharply curbed consumer demand, the economy's main growth engine. Headline consumer prices (CPI) rose 13,4% last month, up from 12,2% in June and just below forecasts for a 13,5% increase, Statistics SA figures showed. During the month itself, CPIX jumped 2,5% and CPI 2,1%.
Electricity prices rocketed 23% during the month - in line with expectations as municipalities began to implement Eskom's tariff hike of 27,5% for this year. This pushed the annual rise in the fuel and power component of CPIX up to nearly 24% from 9,6% in June. Further pressure is expected this month as municipalities continue to pass price rises on to consumers.
Food prices continued to rise last month despite a slowdown at the agricultural level, soaring 18,5% after an 18,2% increase in June, the data showed. A hefty 7% rise in petrol prices last month also put pressure on the transport component in both CPI and CPIX.
A modest cut in local fuel prices this month and an expected 10% reduction next month will provide some near-term relief, although the longer-term outlook is unclear because of volatility in global oil prices.
Housing costs were another inflation culprit last month, rising 3,2% in response to hikes in property rates and taxes after a countrywide reassessment.
But the increase was lower than most had expected and Stats SA expects more effects from the new rates this month.
RMB said: "Today's number increases the risk that inflation could peak in August, instead of July."
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