Absa not expecting further interest rate hike

Absa is not expecting a further interest rate hike in the new year, believing it would do more damage to economic growth. However, the bank does point out the risk is on the upside.

Absa’s view is contained in its reaction to today’s announcement that the annual consumer price inflation excluding mortgage costs (CPIX), came in marginally above expectations in November.

StatssSA reported that CPIX inflation for November was 7,9% year-on-year compared with expectations of 7,8% (as surveyed by Inet Bridge) and October’s 7,3%. Headline consumer price inflation (CPI) accelerated further to 8,4% y/y compared with 7,9% in October.

CPIX inflation rose by 0,5% on a month-on-month basis in November, lower than October’s 0,7%. Food inflation continue to push inflation higher, rising by 13,3% y/y compared with 12,3% in October and 11,9% in September.

Increases were broad-based with large monthly increases being recorded for grain products, meat, fats and oils, fruit and nuts and other products. The food component contributed 0,3 of a percentage point to CPIX inflation in November, while medical care and health expenses added a further 0,1 percentage points. The transport component, which contributed 0,1 percentage points to the monthly increase, was driven by a small petrol price hike in November. CPIX excluding food inflation continued to rise, coming in at 5,8% versus 5,5% in October.

Headline CPI rose by 0,4% m/m in November, pushed higher by food and medical care and health expenses.

Food inflation rose by 13,4% y/y in November compared with 13,3% in October. Prices for grain products rose by 2% over the month, pushing the annual rate to 18,2% from 17,3% in October.

Core inflation rose by 6,9% y/y in November, up from 6,4% in October. The CPI for administered prices jumped to 10,5% y/y from 9% in October.

Although broadly in line with expectations, Absa notes that November’s inflation data continued to reflect the negative impact of food prices. Food and transports costs are expected to add further pressure on inflation in coming months.

“We expect CPIX inflation to come in around 8,5% y/y in December, with the risk on the upside. This is the inflation number policymakers will consider when they meet again at the end of January 2008. Of more concern is the fact that our analysis shows that CPIX inflation is likely to peak at around 9% in February. Skyrocketing oil prices will continue to play an important role in the inflation outlook, while food prices are likely to ease off only in the second quarter of 2008.

The bank notes that household spending data over the past few months indicate that consumers are starting to feel the strain of higher interest rates. Real household spending is therefore likely to be considerably weaker in 2008 on the back of very high debt servicing costs, weaker real income and high fuel prices.
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