A deeper than expected slowdown in inflation last month wasn’t enough to convince all economists that there is now a stronger case for the Reserve Bank to hold interest rates at its September 23 meeting, with some still pencilling in a hike.
Consumer prices cooled to 4.3% in July from 5% in June – the highest reading in two years – driven by a sharp drop in fuel prices, and the lowest food inflation since 2010 on better harvests and slower meat price increases, Stats SA said. Stable housing rentals offset far above-inflation municipal tariff increases, helping to keep the overall annual headline inflation number below the 4.5% median estimate of economists polled by Bloomberg.
“This is really a good starting point going into the September meeting,” says Sifiso Mkhwanazi, Alexforbes macroeconomist. The current low level of food inflation may also act as a buffer should El Niño conditions bring a hotter and drier summer, he adds. “We’re in a relatively good position.”
Even so, he reckons Governor Lesetja Kganyago and the rest of the monetary policy committee rather will be looking ahead and focusing on their 3% target – so he is pencilling in a 25-basis point hike, which will take the benchmark lending rate to 7.25%. According to Bloomberg, forward rate agreements, which are used to bet on rate moves, are pricing in a 70% chance of a hike.
“Inflation is still quite hot,” he tells the FM.
PSG Financial Services chief economist Johann Els argues there’s room to hold rates, mainly due to the “almost complete absence of second-round effects from higher fuel costs, apart from the “direct impact on fuel and transport”. In other words, companies aren’t passing all of their higher costs onto consumers.
The stronger rand, which on Wednesday briefly fell to about R16.08/$ before paring its gains, should also reduce pressure on imported inflation, he says. “Looking ahead, I expect inflation to remain around 4.5% for the next few months, before easing further later this year,” Els says.
More support for a hold may come from the Federal Reserve, which is unlikely to hike interest rates, given softer US inflation numbers and aweaker labour market, according to Els. “Overall, I think inflation is well contained and should drift back towards the 3% target over the next year or so.”
‘We’re targeting 3%’
Keabetswe Mojapelo, head of economic research at Old Mutual, believes the July inflation print is not a reason to celebrate just yet. Relief came in the form of a temporary de-escalation in tension between the US and Iran, driving Brent crude down to $72 a barrel from more than $126 at the peak of the conflict at the end of April.
Annual transport inflation eased to 8.9% in July from 12.7% in June, mainly due to a 7.1% decrease in petrol prices and an 11.7% drop in diesel prices between the two months, pulling the annual rate for fuel down to 20.6% from 34.3% in June. Despite the monthly decline, petrol is still 19.3% and diesel 28.8% more expensive than a year ago.
The uncertainty over what happens next will keep Kganyago focused on his inflation mandate.
“We need to start putting these things into context, let’s not say, the Reserve Bank might just hold, or cut. We’re not targeting 4% or 3.5%, we’re targeting 3,” he says, referring to the central bank’s 1-percentage-point tolerance band. “Forget the band, it’s just a metric.”
For Mojapelo, it’s just as important to watch inflation expectations, which are tracking higher. A Q2 survey by the Bureau for Economic Research (BER) found that households, analysts, businesses and trade unions expect inflation to rise to 4.4% over the next year vs earlier expectations of 3.6%.
“You run the risk of those expectations becoming a self-fulfilling prophecy, within the inflation number itself,” he says. “At some point, they need to start checking the fact that expectations are running away.”