Absa forecasts February rate increase

Although South Africa’s November’s CPIX inflation came in lower than expected, rising by 5% year-on-year (y/y) which is the same level as the previous month, Absa is sticking to its long held guns of a further 50 basis point rise when the SA Monetary Policy Committee meets again in February.

If realised, this would be the fifth successive increase announced at the bi-monthly meetings.

Actual headline inflation registered during November, according to Absa, however, was at 5,4%, also unchanged from October’s level.

On a month-on-month basis, CPIX inflation fell by 0,1%, driven largely by the transport component, which subtracted 0,2 of a percentage point. In addition, the food component, which has been the major driver of inflation over the past few months, eased off, adding only 0,1 of a percentage point to the monthly change, following a 0,3 percentage point addition to October’s inflation.

Headline inflation also rose by 0,1% m/m, with transport subtracting and food adding to the monthly change. The acceleration in food prices slowed from 9,9% y/y in October to 9,1% in November with food increasing by a mere 0,1% m/m compared with 1,3% in
October. The biggest slowdown came from meat prices, which, after rising by 3,1% m/m in October, only increased by 0,3% in November.

However, on a year-on-year basis, meat price increases in November still exceeded the 20% level. Grain prices, despite slowing from 0,5% m/m to 0,1%, rose from 6,6% to 6,8% on an annual basis. Vegetable prices too experienced a large 2,2% m/m fall after a 0,2% decline in prices during October.

The transport component was positively impacted by the 21c/l drop in the petrol price in November, and will receive further support from the, albeit small, 7c/l drop in prices in December. Food prices, however warns Absa, could still edge higher in December as festive season demand drive prices higher. There has been a shortage of meat amidst rising household demand and this could drive prices even higher.

The CPI for administered prices rose by 4,3% y/y in November, up from October’s 3,6%. This rate was driven by electricity price increases, school fees and other housing-related tariffs.

Although November’s inflation readings was positive for the interest rate outlook, Absa says it is probably too early to become overly excited about the inflation outlook. Food price increases during the festive period could put further pressure on December’s inflation, while some products surveyed quarterly, in particular motor vehicle insurance and public transport tariffs, will be included in December’s data.

“We remain concerned about other inflationary pressures in the economy and expect CPIX to breach the upper limit of the target band in 2007, putting more upward pressure on interest rates. We anticipate another rate hike of 50 bps in February 2007”, says Absa.

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