High inflation pressures Reserve Bank

Johannesburg – South Africa must brace itself for another rate hike after inflation accelerated the fastest rate in 17 months in January, adding pressure on the Reserve Bank to continue raising interest rates even as economic growth is forecast to slump further.

The inflation rate jumped to 6.2 percent, the first breach of the top end of the Reserve Bank’s target since August 2014, from 5.2 percent in December, Statistics SA said yesterday. The market consensus was for 6 percent. The higher-than-expected inflation bolstered the case for further rate hikes.

At the same time, December retail sales accelerated by a robust 4.1 percent after expanding by a revised 3.8 percent in November. The market consensus was 3.3 percent.

Economists said this would soften the bite of higher interest rates and weak growth.

Food prices

They said the rand’s 8.6 percent decline against the dollar since the start of December and the worst drought in more than a century were driving food prices higher.

The Reserve Bank increased its benchmark repo rate by 50 basis points to 6.75 percent last month and said it expected price growth to exceed its 3 percent to 6 percent target band until next year.

BNP Paribas Securities South Africa economist Jeffrey Schultz said: “There’s more clear evidence of the impact of the weaker rand filtering through into more broader based price pressures.

“It is something that will unsettle the Reserve Bank and probably leave them quite comfortable in the decision made last month to raise rates by 50 basis points and I think it’s likely to prompt them to probably act further in March.”

Inflation on food and non-alcoholic beverages surged to 6.9 percent in January from 5.9 percent the previous month.

Transportation prices rose 5.5 percent compared with 1.9 percent in December, driven by higher petrol costs.

Core inflation, which excludes food, non-alcoholic beverages, petrol and electricity costs, accelerated to 5.6 percent in January from 5.2 percent in December – the highest rate since May.

“The severity of the jump will explain why the Reserve Bank acted pre-emptively in tightening. We will now see an extended pause in the tightening cycle,” Razia Khan, the head of Africa research at Standard Chartered Bank, said.

“Hiking 75 basis points in two consecutive meetings is still a very aggressive tightening, especially with the official growth forecast likely to be cut to below 1 percent.”

The Reserve Bank cited rising food prices, higher wages and a weak rand as some of the biggest risks to inflation.

The economists said South Africa could dodge a recession as an uptick in retail sales was likely to keep the economy afloat, but rising interest rates aimed at containing inflation remained a threat to growth.

FNB senior industry economist Jason Muscat said the retail sales figures underscored the relative resilience of the South African consumer.

He said: “Shoppers seemingly kept tills ringing at clothing and furniture retailers, which expanded 6.6 percent and 7.7 percent year on year, respectively. The furniture number was the first expansion for the sector in five months, likely aided by faster credit growth and anticipation of bonuses.”