April 29, 2004

By Vernon Wessels

Johannesburg - Consumer price increases moderated in March, vindicating the Reserve Bank's upbeat view on inflation, but not enough to quell fears of an interest rate hike later in the year.

The central bank's targeted measure of inflation, CPIX, which is headline inflation excluding mortgage interest, slowed to an annual 4.4 percent in March from 4.8 percent in February, according to data released yesterday by Statistics SA.

Economists polled by Bloomberg expected a 4.7 percent rise while those surveyed by Reuters forecast 4.6 percent.

It was the seventh consecutive month that CPIX fell within the Reserve Bank's 3 percent to 6 percent target range. The central bank expects CPIX to stay in the target range until April 2006.

On a month-on-month basis, prices rose by 0.6 percent in March after climbing 0.5 percent in February. Food and medical costs fell month on month, while there was an unexpected decline in the cost of employing a domestic worker as Stats SA incorporated new data.

The only negative surprise came from education costs, which were up 9.1 percent on a monthly basis and an annual basis. Pressure also came from sin taxes imposed on cigarettes, cigars and tobacco, as well as non-alcoholic and alcoholic beverages.

A more than doubling in the external value of the rand, which has seen the currency recover from a record worst of R13.84 against the dollar in December 2001 to about R6.70, has pushed down the prices of imported goods. The rand averaged R6.54 against the dollar in December, R6.92 in January, R6.73 in February and R6.61 in March. CPIX averaged 6.8 percent last year and 9.3 percent in 2002. 

The broadest measure of inflation, the consumer price index (CPI), slowed to an annual 0.4 percent last month from 0.7 percent in February.

Prices in the CPI basket rose 0.7 percent between February and March after an increase of 0.5 percent between January and February.

Adenaan Hardien, the chief economist at African Harvest Fund Managers, said the latest inflation numbers "were but a temporary reprieve" and did not alter his view that the sharp disinflationary trend that started in the fourth quarter of 2002 had ended and was now in reverse.

There was a risk that the upper end of the target range could be breached in the fourth quarter of this year, he said. "While a rate hike in the fourth quarter seems a fair bet, a hike as early as the third quarter cannot be ruled out," Hardien said.

John Stopford, a portfolio manager at Investec Asset Management, said CPIX would move towards the top of the target range but would stay within the band this year. "We are therefore sticking to our forecast of two small adjustments of 50 basis points each over the next year."

Monica Ambrosi, an economist at Standard Bank, expected rates to remain on hold for "most, if not all, of 2004" although there was no room for Reserve Bank complacency.