South African Reserve Bank file photo
Economists said yesterday that the rise in consumer inflation would force the MPC’s hand after a favourable trend in the early months of 2018 had given it room to lower the repo rate by 25basis points in March.
NKC African Economics analyst Elize Kruger said the MPC would most likely leave interest rates unchanged for a prolonged period.
“The upward trend in consumer inflation will slowly erode consumers’ purchasing power and will partially offset the optimism that took hold of households following recent political developments, the 25basis points drop in interest rates and the generally positive impact of the stronger rand exchange rate on imported prices,” Kruger said.
Yesterday, Statistics South Africa (Stats SA) said the CPI inched up last month on the back of the percentage point value-added tax increase and fuel price increase last month. In March, the CPI registered 3.8percent.
Stats SA said the surge stemmed mainly from housing and utilities, miscellaneous goods and services, food and non-alcoholic beverages as well as transport.
The agency said the core measure of inflation also spiked to 4.5percent year-on-year, up from 4.1percent in March.
Kruger said the country was yet to feel the full impact of the increases as the CPI partially reflected the exogenous shock of the VAT rate hike.
Kruger said the CPI reflected the first of at least three months of hefty fuel price hikes that was likely to inflation rate higher in coming months.
“Cumulative fuel price increases in excess of R2/litre over the three months to June will more than wipe out the benefit of earlier drops and constrain consumers,” she said.
Kruger said the upward trend in consumer inflation would slowly erode consumers’ purchasing power and would partially offset the optimism that took hold of households following recent political developments, the 25basis points drop in interest rates in March and the generally positive impact of the stronger rand exchange rate on imported prices.
Investec economist Lara Hodes said yesterday that further substantial fuel price rises in the following months, on the back of the higher oil price and the weaker domestic currency, would hike CPI.
“Taking into effect these inflationary pressures, with risks to the upside, together with concerns over the faster pace of normalisation in US monetary policy, it is unlikely that the MPC will adjust the repo rate,” said Hodes.
She said Investec had lifted its CPI forecast for 2018 to 5.1percent year-on-year and 5.5percent year-on-year for 2019.
Momentum Investments said the Reserve Bank was likely to leave the interest rates unchanged for some time.
– BUSINESS REPORT