Absa holds firm on forecast of rate increases

Although August’s inflation data were in line with expectations with CPIX inflation coming in at 5,0% year-on-year (y/y), Absa still expects the South African Reserve Bank to hike interest rates by another 50 basis points in October, with another 50 basis point hike in December penciled in.

Headline CPI inflation, which was negatively impacted by the rise in interest rates in August, rose by 5,4% y/y—also in line with consensus expectations.

CPIX, according to Absa, reached its highest level since mid-2004 while CPI inflation was at its highest level in three years. In August, the month-on-month (m/m) increase for CPIX inflation was 0,5%, much lower than the 1,1% increase recorded in July. August’s monthly increase was driven by transport, which added 0,3 of a percentage point to the monthly increase, while food added 0,1 of a percentage point.

Cigarettes, cigars and tobacco also added 0,1 of a percentage point. The transport component was again pushed higher by the 31cents per litre petrol price increase. Excluding the fuel component, CPIX inflation was 4,0% (3,9% in July), pointing to a further increase in second-round price increases caused by higher fuel prices. CPIX less fuel inflation was at 3,2% y/y in March 2006.

Headline inflation rose by 0,8% m/m following the 1,6% increase in the housing component in July. With food making up one quarter of the inflation basket, food price increases remain a concern. Food prices rose by 0,5% m/m and 8% y/y in August, with meat prices rising by 16,6% y/y, grain prices by 5,7% and vegetable prices by 10,1%. Excluding food prices, CPI inflation in August was 4,6% while CPIX inflation was 4,3%.

The CPI for administered prices rose by 9,8% y/y, unchanged from July’s increase. Administered prices continued to be driven by fuel price increases such as the increase in early August. However, September’s 36 cents per litre petrol price decrease and the expected petrol price relief in October, estimated at over 60 cents per litre, could see a slowdown in administered price increases.

However, the medium term prospects for fuel prices remain cloudy despite the recent drop in oil prices below $60/bl. OPEC appears keen to cut production in order to prevent prices from falling further, while the rand remains volatile, reaching a two-and-a-half year low of close to R7,70 against the US dollar recently. With the rand oil price still at around R460 per barrel, local fuel prices could come under further pressure if oil prices rise again or the rand falls further on current account concerns.

The SARB’s September 2006 Quarterly Bulletin confirmed that consumer demand during the second quarter continued at a brisk pace while household debt levels reached new record-highs of nearly 70% of household disposable income. New vehicle sales for August also showed that consumer demand in the third quarter continued unabated.

The SARB’s Monetary Policy Committee meets on 11/12 of October.
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