Investec Asset Management thinks that rate cuts are now very unlikely as it believes the country has now seen the bottom of inflation.

Although still relatively weak, it believes, however, that growth will pick up.

"We think the next move in interest rates is likely to be upwards, some time in the second half of the year," said John Stopford, portfolio manager at Investec Asset Management,

Commenting on the consumer inflation data for January released by Statistics South Africa yesterday, Stopford said that CPIX for the month, which rose 1.1% month on month and 4.2% year on year, had come in somewhat worse than consensus. But the detail was mixed, he added, with some encouraging elements in terms of very low increases or small falls across a broad range of traded goods items.

"We are still seeing the impact of rand strength in some items, like clothing and footwear, non-alcoholic beverages, recreation and entertainment. The remains of the interest rate cuts are also coming through in the 'other' category, which includes overdraft costs."

Further, there was no increase in tobacco or vehicle prices. The other favourable effect, Stopford pointed out, was the continued muted increase in rental inflation. "The buoyancy of the housing market is probably encouraging people to buy rather than rent."

Although communication, which includes telephone charges, rose sharply month on month, Stopford said the increase was far lower than last year, reflecting more control on administered prices, an important long-term concern of the Reserve Bank Governor.

Stopford said some increase in food prices had been expected, although at 1.1% month on month it was sharper than anticipated. "This is probably in part due to the impact of the drought, which was already evident in the PPI numbers last month, as well as a slightly weaker currency."

The other big increase, he said, was in medical care and health expenses, which rose by 8.1%. "This is still a problem area given the rising demand for private medical care."

Looking ahead, Investec Asset Management believes that the favourable base effect that brought inflation down last year is unwinding.

"We also expect that pressure from relatively high labour cost growth, pressure on food prices and firm petrol prices as a result of the tax increases announced in the budget will all contribute to inflation picking up towards the top of the band by the end of the year.

"We think rate cuts are now very unlikely, as we have seen the bottom in inflation. Although still relatively weak, we do believe growth will pick up. We think the next move in interest rates is likely to be upwards, some time in the second half of the year."

I-Net Bridge 26 February 2004