Inflation prospects may not be so bad after all 
Ayanda Shezi

Economics Correspondent

IT MAY be early days yet, but the inflation outlook may be not as bearish as previously expected. If the rand trades for a sustained period below the R7 to the dollar level, the Reserve Bank may not need to hike interest rates too aggressively to secure its inflation target.

A relatively stronger rand has been instrumental in keeping inflation at benign levels, particularly in the face of rising oil prices. The rand came under pressure in May from increased aversion to emerging-market risk, made worse by SA’s widening current account deficit, which saw the local currency dip to R7,52 to the dollar.

Moody’s economist Paul Guest says: “While a stronger currency, if sustained, will reduce the need for further rate hikes by muzzling imported price pressures, it does not entirely eliminate that need. There will be more hikes, though likely not as many as futures markets have discounted.”

Over the past five days, the rand has gained about 3% against the dollar. This week sees the release of June inflation data by Statistics SA, starting with consumer inflation on Wednesday.

Higher fuel prices in the month are expected to have played a big role in higher prices in the month.

The petrol price rose 36c/l a at the beginning of last month.

Kagiso Securities economist Elize Kruger says: “The June release will be closely watched for any sign of secondary inflation pressures appearing on the back of the rand’s slide since mid-May.

“However, given the lags often involved in price setting, the real impact is only expected from July onwards, and will depend crucially on the level where the rand exchange rate stabilises.”

In May, CPIX (consumer price index excluding mortgage costs), the Reserve Bank’s targeted measure of inflation, rose to 4,1% year on year, and it is expected to have climbed to about 4,8% year on year last month.

JPMorgan economist Marisa Fassler says: “The rapid rise in inflation through midyear is mainly due to the almost 30% run-up in petrol prices since March.” However, says Fassler, food price inflation has also been rising sharply over the past few months, and it is likely to have jumped to almost 7% year on year, from 6,2%.

The Reserve Bank hiked interest rates at the beginning of last month on the back of rising oil prices, strong credit growth and a widening current account deficit.

“Expectations about further interest-rate hikes in SA are closely linked to the performance of the rand, and the recent strong recovery in the currency has reduced the extent of policy tightening expected over the next 12 months,” Fassler says.

“However, regardless of the currency’s performance, we believe there are important domestic issues such as growing inflation pressures, strong domestic credit extension and the rapid widening of the current account deficit, that will compel the Bank to raise interest rates again.”

The deficit widened to 6,4% of gross domestic product (GDP) in the first quarter of this year, the highest in 24 years, heightening concerns about how this growing deficit will be financed.

The producer price index (PPI), which will be released on Thursday, is expected to climb to about 6,8%, from 5,9% year on year in May.

“The significant monthly increase is due to Eskom’s winter electricity tariffs … implemented in June. It could be considered a seasonal phenomenon,” says Kruger.

The tariffs will be reversed again during September.

In addition to electricity prices, food and oil prices are likely to have added to higher PPI last month.

“Generally, food prices at the producer level remain high, which makes it unlikely that retail-level price pressure will subside soon,” Standard Bank economist Danelee van Dyk says.

Internationally, markets will be watching Middle East hostilities, which have affected global commodity markets over the past two weeks.

On Friday, the US will release GDP data for the second quarter of this year.

The world’s largest economy grew at 5,6% in the first quarter of this year. Growth is expected to have slowed somewhat in the second quarter.

US Federal Reserve chairman Ben Bernanke hinted last week that the Federal Reserve was closer to the end of its rate-hiking cycle. “The federal open market committee sees that the current economic framework is falling into place enough for the Fed to pause its current monetary policy tightening,” Van Dyk says.

“Still, and we cannot ignore this, there is room for another rate hike at the Fed meeting, should economic data released closer to the date of the (committee) meeting indicate the envisaged slowdown has not gained enough traction.”

This week the rand is expected to be trading between R6,75 and R7,15 to the greenback.