Amidst the spectre of higher inflation in the months to come, Investec Asset Management is forecasting that the South African Reserve Bank (SARB) will begin raising interest rates at its Monetary Policy Committee (MPC) meeting June-by 50 basis points-followed by another 50 basis point hike at the August meeting. Even more interest rate rises are "a real risk" during the second half of 2004, the group believes, especially if the rand keeps "misbehaving".

Providing an update on Investec Asset Management's forecasts,  portfolio manager John Stopford said that November had marked the low in inflation for the current cycle. CPIX (headline consumer inflation less changes in mortgage costs) was expected to pick up quite sharply from February, potentially breaching the 6% upper-end of the SARB's target from the middle of 2004.

"This is substantially more pessimistic than consensus forecasts of inflation," observed Stopford. "Our relative bearishness is based on four factors.

"Firstly, quarterly measures of momentum bottomed out as long ago as July and have been sitting between 5-6% since September. This suggests that inflationary momentum is already becoming more negative.

"Secondly, the rand has stopped appreciating and has begun to depreciate. This will remove the downward impact of falling imported inflation on CPIX. The outlook for the Rand is no longer a positive.

"Recent trade data suggests that lost competitiveness, buoyant domestic demand and dire agricultural conditions are likely to result in a current account deficit that could be problematic to finance without a weaker currency. At the same time, narrowing interest rate differentials with the rest of the world and increased volatility will undermine the support from short-term capital flows.

"Thirdly, maize futures have almost doubled due to the drought since bottoming last April. Food inflation looks likely to rise sharply as a result, although there may be some offset from lower meat prices, with farmers slaughtering animals given the shortage of food and water.

"Finally, commodity prices and, most significantly, oil prices are rising on the back of a weak dollar. Petrol prices look set to go up by over 30 cents per liter next month and should rise further over the next few months."

The only positives on the inflation front were signs of moderation in some administered prices and evidence that a buoyant housing market was putting downward pressure on rental inflation, Stopford added.

As a result of the deteriorating inflation outlook, Investec AM doubted the MPC would be inclined to cut interest rates again when they meet in February, he said, although they would have no additional inflation data by then.

In the long-run, Investec AM expected the battle against inflation to be won, but expectations and wage settlements needed to come down to levels that were more consistent with attainment of the inflation target for this to happen, noted Stopford.

"This will take time, and for the next two years we expect CPIX to spend much of the time skirting the top end of the target band."

Both CPIX and PPI results for December are scheduled to be released next week. Investec AM expects CPIX, which will be released next Tuesday, to be up 0.3% month-on-month and 4.3% year-on-year, up from 4.1% in November.

According to Stopford, the monthly increase should be due to a moderate rise in food prices, based on recent producer price data, and a further rise in the cost of employing domestic workers, impacted by the introduction of the minimum wage. He expects other categories to be fairly benign.

"The quarter-on-quarter seasonally adjusted and annualised rate of inflation, a measure of inflationary momentum, probably dipped down from 5.9% to 4.9%," Stopford said.

Investec AM expects PPI for December, to be released on Wednesday, to have fallen by 0.4% month-on-month and be down 2.2% year-on-year, slightly above November's reading of -2.5%.

I-Net Bridge