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Inflation decelerates to 6.1% in May, surprising economists
Inflation decelerates to 6.1% in May, surprising economists

Inflation decelerates to 6.1% in May, surprising economists

ECONOMIC NEWS - Jun 22nd 2016, 12:15

INFLATION, as measured by the consumer price index (CPI), decelerated to 6.1% in May from 6.2% in April, surprising economists who had expected to rise to about 6.3%. 

The slight drop in inflation will probably prompt the Reserve Bank’s monetary policy committee to hold its repo rate at 7% on July 21. The central bank was widely expected to raise the repo rate from 7% to 7.25%, but now finds itself squeezed between inflation above the government’s 6% ceiling and a contracting economy.

Following Tuesday’s business cycle data from the Reserve Bank, which showed April’s leading indicator dropping 0.9% from May instead of rebounding as generally expected, Investec economist Annabel Bishop wrote in a note the Reserve Bank “may find itself in the position of having to reverse recent repo rate hikes if activity falls off materially further.”

“The SARB recognises that the business cycle is in a downward phase, beginning in December 2013, and defined as occurring when the pace of aggregate economic activity is slower than the long-term rate of aggregate economic activity.”

Nedbank's economic team said in a note: "Regardless of the moderation in the previous two months, the inflation rate is forecast to increase in the months ahead, driven mainly by higher food prices due to the effect of the drought. The weak rand and higher administered prices will also continue to exert upward pressure, with CPI likely to remain above the 6 % upper target until the last quarter of 2017.

"The Reserve Bank continues to face the challenge of striking a good balance between the weak economy and the poor inflation outlook. This makes monetary policy choices difficult. The delay in US interest rate hikes, the stay of execution by the rating agencies and poor economic data reduce the chances of further monetary policy tightening in the short-term. However, much will depend on the rand as the year progresses. For now we anticipate one more hike of 25 basis points in the second half of the year."

"This was a pleasant surprise as most forecasts were for a mild acceleration. The below consensus print was largely due to an earlier than expected deceleration in food inflation, although this is likely to be temporary but more contained," ,First National Bank senior industry analyst Jason Muscat said in a note on Wednesday.

"A slightly lower inflation trajectory, a Fed that is likely to pause, and the very weak domestic growth environment are all likely to provide the SARB monetary policy commitee with enough justification to keep rates on hold at their next meeting.

"Food inflation registered 10.8%, from 11.3% in April, with all but two food sub-components registering slower growth on both a year-on-year and month-on-month basis. We attribute the slower food inflation growth to a combination of weak customer demand, as evidenced by weakening retail trade sales, and the impact of base effects from the drought which are beginning to take hold.

"There was also assistance from a lower fuel price which fell 1.4% from the previous year as well as private and public hospital inflation which declined from 6.2% in April to 4.9%. While there is still likely to be a reacceleration of headline inflation in the latter half of the year, recent rand appreciation and dissipating food inflation threats suggest that the peak may not be as high as initially envisaged.

Investec's Bishop said in a note on Wednesday: "The fall in aggregate demand in South Africa’s economy is causing inflation to come out lower than expected, and this will likely prove the case for the monetary policy committee's inflation forecasts both this year and next.

"SA’s economy is at significant risk of recession this year, estimated at a 40% chance, with 1.2% a drop in gross domestic product recorded in teh first quarter of 2016. Unlike in 2009 when the SARB cut interest rates as the economy contracted, the SARB hiked interest rates by 75 basis points in first quarter as the economy contracted. Household consumption, which is directly influenced by interest rates, fell by 1.3% during the first quarter.

"Further interest rate hikes are inappropriate given aggregate demand is falling by close to 2% in the first quarter.

"The petrol price rose by 12c/litre in May and 52c/litre in June, while a 17c/litre hike is building for July, following higher oil prices, which will limit the speed CPI inflation declines by this year. The hawkish SARB may choose to hike the repo rate further this year. However, in 2017 CPI inflation is likely to fall below 5%," Bishop 

Read more about: south africa | inflation | economy

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