Inflation uptick unlikely to deflect Bank

August’s consumer inflation uptick is unlikely to unsettle the SA Reserve Bank’s monetary policy committee (MPC) as it gets ready to pronounce on interest rates on Thursday.

Though annual consumer price inflation (CPI) hit 4.9% in August, the fourth month it has floated above the 4.5% midpoint of the Bank’s target range, the increase, due largely to fuel prices, is broadly in line with market forecasts.

With expectations of local inflation remaining in check, the Bank is unlikely to make any moves to lift rates from record lows before the end of the year, according to a number of economists.

The Bank has left rates at 3.5% for more than a year in a bid to support businesses and households through the coronavirus shock, which caused GDP to shrink 6.4% last year.

The Bank forecasts inflation to average 4.3% for 2021, 4.2% in 2022 and 4.55% in 2023. Though no move on rates is expected, analysts have said they will be watching the outcome of the meeting closely for any clues as to when the MPC could begin normalising monetary policy.

Fuel prices were a main driver in the latest print, rising 19.6% from a year ago, after steep rises in petrol prices in August pushed the price of inland 95-octane petrol to R18.30/l, Stats SA said on Wednesday.

Food also contributed to the increase, with food prices — which account for more than 15% of the CPI basket — rising 7.4%.

Stats SA said, however, that there are signs that food inflation may have begun to slow. On a monthly basis, the increase in August 2021 was 0.2%, which is identical to the readings for July and June, according to the agency.

Though food and fuel prices continue to power overall inflation, by contrast services, which make up 51% of the consumer basket, saw price inflation of just 2.8% year on year, being essentially unchanged from July, said RMB chief economist Ettienne le Roux. He said that underlying, or core, CPI — which is stripped of food and energy prices — ticked higher to only 3.1% year on year in August, a level it has been hovering around for the better part of the past 18 months.

“This is good news. It means sharply higher prices of food, petrol and other volatile items continue to have limited secondround effects,” he said.

Subdued core inflation reflects weak levels of domestic demand, said Momentum economist Sanisha Packirisamy.

Higher food and fuel weightings in consumer inflation baskets in other emerging markets triggered higher rates of headline inflation and prompted central banks in these markets to raise interest rates, she said.

In SA’s case, however, the lower price pressures in the services component of the basket provided an anchor for headline inflation.

Benign inflation and longerdated inflation expectations, which remain close to the midpoint of the target band, will help stave off interest rate hikes until the first quarter of 2022, according to Packirisamy.

Though there are upside risks to inflation from the likes of global supply chain disruptions and rising global food prices, these will probably be contained by SA’s subdued economic recovery, according to Nedbank economists Candice Reddy and Nicky Weimar.

Against this backdrop rates are expected to remain unchanged for the rest of the year, with a hiking cycle likely to start only early next year, they said in a note.

Absa economist Miyelani Maluleke said there is little in the August print to change expectations that the MPC will unanimously keep rates on hold on Thursday.

But the MPC’s statement and the question and answer session that will follow will be “more critical for clues on when the [Bank] may want to begin its normalisation of monetary policy”, said Maluleke.