CPI in target eases rates hike pressure

CPI in target eases rates hike pressure

FMCG SUPPLIER NEWS

Fin24 - Apr 20th 2012, 07:38

Johannesburg - South Africa's headline inflation slowed in March to within the central bank's target range for the first time in four months, suggesting inflation may undercut the bank's forecasts and ease pressure for action in the form of an interest rate rise. 

The fall was in line with expectations.

However, retail sales showed a surprise jump, with 7.2% annual growth in February suggesting strong activity on the high street.

Most economists expect the Reserve Bank's next rate move to be up as it seeks to contain inflation, but those expectations are going to be pushed back if price pressures continue to trend lower.

Annual inflation braked to 6% in the last month of the first quarter, from 6.1% in February.

The move back to the Reserve Bank's 3-6% band means inflation may now peak beneath the 6.5% the bank has predicted for the second quarter of this year.

"It seems that CPI (consumer price index) may have already peaked and the coming months are likely to see smaller month-on-month increases, while the year-on-year rate could remain somewhat subdued, lingering not far from the current target level," said Anisha Arora, an emerging market analyst at 4Cast.

The Reserve Bank has kept rates steady at a historical low of 5.5% for the past 16 months, and is unlikely to take any action until the end of this year at the earliest.

A bullish outlook for the rand, prompted by the prospect of major foreign inflows to domestic debt should South Africa become part of an influential Citigroup world bond index, is also likely to contain inflation.

Short-lived spending spree

February retail sales figures surprised economists, especially after an upwardly revised 4.2% in January, although analysts said the trend was unlikely to last as consumers knuckled down for rising transport and food prices.

The introduction at the end of April of road tolling around the economic hub of Johannesburg is set to put a cap on non-essential spending, with some commuters facing more than R500 a month in extra travel costs.

Sales growth is expected to show some strain in the second quarter, with the economy spluttering along at around 3% annual growth, making little dent in unemployment which officially stands at 24% of the labour force.

"We don't expect that growth momentum to continue during the course of the year, given the high administered prices such as the petrol price," said Johannes Khosa, an economist at Nedbank.