After gloomy inflation data released on Wednesday, economists are warning that an interest rate hike could be on the cards in March.
The inflation rate has breached the South African Reserve Bank’s (Sarb’s) target of a 3% to 6% range by accelerating to 6.2% year-on-year (y/y) in January 2016, up from December’s 5.2% y/y. The month-on-month number grew 0.8% in what some see as a clear sign that pass-through effects are accelerating.
Inflation does not bode well for either consumers or retailers who are already under pressure, and suggests that Sarb’s monetary policy committee (MPC) may opt for another 25 basis-point interest rate hike at their meeting next month, according to FNB senior industry economist Jason Muscat.
Goods inflation registered at 6.5%, breaching 6% for the first time since 2014. Services inflation also reached the 6% mark, reflecting not only rand weakness but also the growing inability of businesses to absorb these cost pressures.
Food and transport costs in particular are driving the number higher, a trend expected to continue given the drought, slightly higher oil prices and persistent currency weakness.
Overberg Asset Management analyst Kirk Swart said the breach reflects the effects of the weakening exchange rate and the drought filtering through.
“The Sarb was pre-emptive in their rate hike by increasing the repo rate in the previous MPC meeting. The rate hike will, in theory, combat inflation via the transmission mechanism by slowing down economic growth,” he added.
“However, a lot of the inflation is not due to a growing economy. The inflation is due to the weak exchange rate and drought. Thus a rate hike will have minimal use in combating inflation.”
Swart explained that most of the currency weakness is due to economic factors nationally and an emerging market selloff internationally. He believes political events did contribute to the softer currency, albeit only marginally.
Peter Attard Montalto, emerging markets economist at Nomura, said the most important factor is core inflation.
“After so many quarters of negative surprises, inflation surprised to the upside even in a relatively low survey month and shows the risk premia coming into prices from the political events of December and faster pass through now occurring,” he said.
“The Sarb will be very worried about this move, especially as expectations also rise and it now means a pause may not happen in (their) March meeting as we previously expected.”
MMI Holdings economist Sanisha Packirisamy also said rising inflation pressures point to further interest rate hikes. She added that despite elevated global food stocks keeping international food prices more than 10% lower than a year ago, unfavourable domestic weather conditions and a weaker currency have driven domestic food prices higher.
She believes elevated administered price increases, the potential for an additional steep hike in electricity prices and the rising threat of second-round inflation point to the headline consumer price index rising close to 6.5% y/y in 2016 from 4.6% y/y in 2015.
“The Sarb noted that they will remain focused on the evolution of inflation expectations and will pay close attention to any indications of second-round effects of the exogenous shocks to inflation. The uptick in core inflation in recent inflation prints could suggest the possible emergence of such second-round inflation pressures,” she said.