INFLATION edged up last month for the first time since April, reinforcing expectations that the Reserve Bank will keep interest rates unchanged when its monetary policy meeting ends on Monday.
The annual rise in the consumer price index (CPI) ticked up to 5% from 4.9% in July, boosted mainly by hikes in housing utility costs, as well as fuel and food prices. But the increase was modest enough to keep inflation well inside the 3% -6% official target range monitored by the Bank for interest rate decisions.
After the Bank unexpectedly trimmed its repo rate in July, there has been speculation that there could be another reduction today, but most analysts believe this is very unlikely.
"Our expectation remains that the Bank’s monetary policy committee will leave the repo rate unchanged," Cadiz Asset Management economist Adenaan Hardien said yesterday. "We remain of the view that the repo rate has bottomed. In our view, further rate cuts would require a meaningful deterioration in economic fundamentals."
The Bank cited an improved inflation outlook, a fragile domestic economy, and an uncertain global backdrop for its decision to cut the repo rate by half a percentage point to 5% in July.
The slight pick-up in inflation last month does not tarnish the benign outlook for price pressures in the domestic economy.
"We expect inflation to remain around 5% for the remainder of the year," Nedbank economist Busisiwe Radebe said. "Softer spending and a weaker global economy are likely to keep inflation contained through 2012," she said.
On a monthly basis, inflation rose by 0.2%, buoyed by higher petrol prices and an increase in tariffs for electricity and water, Statistics SA figures showed.
Core inflation — which excludes food, petrol and energy — nudged up to 4.6% from 4.5%. Inflation for goods and for services was steady at 4.2% and 5.8%, respectively.
A detailed breakdown of the CPI showed that food inflation subsided to 5.1% last month from 5.4% in July, in response to lower prices for bread, cereals, processed food and fish.
So far, a surge in global maize prices sparked by a severe drought in the US has not fed through into domestic inflation, but analysts say there is normally a six-month lag.
Local maize futures prices have fallen by more than 14% since the end of July, but are still up 13% in the year to date.
Petrol prices will push inflation higher in the near term, after a 93c/l increase this month, and an expected smaller hike next month. There is also likely to be upward pressure on this month’s inflation rate from the inclusion of quarterly price surveys for rentals, owners’ equivalent rent and domestic worker wages.
In the medium term, a more stable exchange rate for the rand and lower global oil prices should help keep price pressures in check.
Absa Capital is one of the few financial institutions that expects the Bank to cut its key repo rate today, citing the slowing global and domestic economy, combined with a well-contained inflation outlook.
"We think that the Reserve Bank has a cutting bias, so whenever they can justify a cut, they will," said Absa Capital economist Ilke van Zyl.
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