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Hike in consumer inflation catches market on back foot

Hike in consumer inflation catches market on back foot

Food prices have surprisingly pressured consumer inflation to rise marginally after two consecutive months of decline, leaving the South African Reserve Bank (SARB) with no choice, but to hike its benchmark lending rate for the last time this year.

Another interest rates hike will make the cost of borrowing even higher, lifting the repurchase rate – the rate at which the SARB borrows money to commercial banks – from an already elevated 6.25%.

Data from Statistics South Africa (Stats SA) yesterday showed that the headline inflation rose to 7.6% year-on-year in October, up from 7.5% in September.

This was the first time consumer prices had risen since July’s 7.8% peak, and was above market expectations of 7.4% and the upper limit of the SARB’s target range of 3% to 6%.

On a monthly basis, the consumer price index (CPI) rose by 0.4% in October, up from 0.1% the previous month.

Worryingly, core inflation, which excludes food and non-alcoholic beverage prices as well as excluding fuel and energy costs, rose to 5.0% in October from 4.7% in September.

Investec chief economist Annabel Bishop said price pressures had broadened as consumer price inflation (CPI) lifted.

“Second-round effects have become more apparent as the year progresses, with the residual category also contributing to the overall lift in the CPI by 0.1% month-on-month – which further indicates the broadening nature of CPI inflationary pressures in South Africa,” Bishop said.

Stats SA said bread and cereals, meat and dairy had driven food prices higher in October, with the annual rate increasing to 19.5% from 19.3% in September.

Annual meat inflation also quickened in October, rising to 10.5% from 9.9% in September as beef prices registered large monthly increases, most notably steak, stewing beef and mince.

The dairy index, milk, eggs and cheese, registered an annual increase of 10.5%, the highest rate since February 2017.

Fuel inflation, however, continued to decline as used vehicle prices rose in October, with the annual change for the transport index softening from 17.9% in September to 17.1% in October.

Inflation now averages 6.8% this year to date, which remains above the top end of the SARB’s target band, but inflation is expected to trend downwards in the coming months.

Economists have penned another 75 basis points interest rate hike by the SARB from 6.25% to 7% per annum, which would increase the prime lending rate.

The SARB discussed a 100 basis points hike at the last Monetary Policy Committee (MPC) meeting, but opted for a 75 basis points hike to tame inflation.

Nedbank economist Johannes Khosa said upside risks to the outlook persisted and could cause inflation to either remain steady at elevated levels for longer or recede at a much slower rate.

“We forecast that the SARB will take an aggressive stance, hiking by 75 basis points before scaling down to smaller increments of 25 bps in January and March 2023,” Khosa said.

“This will take the prime rate to a peak of 10.75% in the current hiking cycle. Our interest rate forecast faces upside risk.”

Inflation has also been moderating in major developed economies, with the slowdown in the US particularly suggesting that the US Federal Reserve (Fed) might start reducing the pace of interest rate hikes soon.

FNB senior economist Koketso Mano said the Fed hiked interest rates by 75 basis points at its November meeting and is expected to hike them by a further 50 basis points in December.

“This, along with concerns over unfolding second-round effects, should prompt further hiking by the SARB this week,” Mano said.

“We expect the pace of hikes to slow to 50 basis points, following 75 basis points hikes in each of the past two MPC meetings, in line with the hiking cycle nearing a peak.”

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