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Oil-fuelled CPI increase in August unlikely to steer Reserve Bank away from keeping rates flat

(Photo: Simon Dawson / Bloomberg)

South Africa’s consumer inflation inched higher in August to 4.9% year-on-year, from 4.6% in the previous month – as the cost of petrol, transport and meat products rose, taking the figure further from the 4.5% midpoint of the Reserve Bank’s target range. But on a monthly basis the increase in price-growth was benign, at 0.4%.

The increase was largely in line with market expectations and hardly changes the central bank’s base-case of moderate inflation this year and in 2022, meaning consumers can still expect a slow rise in lending rates as the uneven economic recovery continues. 

The SA Reserve Bank decides on interest rates on Thursday, and is set to again keep rates on hold at 3.5% at its second-last policy meeting of the year, although rising oil prices globally and a recent tumble by the rand will give the monetary policy committee something to think about. 

“The inflation starting point should not be too much of a concern, except for second-round effects from supply-side inflation, but weak demand should constrain pass-through,” said economist at FNB, Koketso Mano.

Stats SA said petrol prices recorded all-time highs in August, hitting R18,30 per litre. Fuel prices rose 4.9% between July and August, and by 19.6% over the last 12 months, the agency said. 

The higher fuel prices led to increases in transport costs, by 9.9%, while food and non-alcoholic beverages prices were nearly 7% higher on an annual basis.

Oil prices look set to continue climbing, with OPEC members Iraq and Nigeria warning this week of higher prices due to increased demand owing to natural gas shortages, likely pushing per barrel prices well above $75.

However, core inflation, a measure that strips out food and energy prices – considered volatile products that sometimes mask the long term trend – was well below the headline CPI figure, printing 3.1% year-on-year and only 0.3% against the previous month. 

“The gap between core and headline inflation reflects upward inflationary pressure from volatile goods, particularly fuel. Excluding fuel, headline would have posted 4.2%,” said FNB’s Mano.

The Reserve Bank’s stance will also have to consider the recent revision of the country’s GDP. The economy is now 11% bigger, at an estimated R5.5 trillion, after Stats SA rebased the figures earlier this month. That means 2020’s record GDP contraction of 7% is now 6.4%.      

“Besides the rate decision, there will be some focus on the SARB’s take on what the recently released GDP rebasing/historical revisions, as well as the better-than-expected 2Q21 GDP print, imply for the growth outlook,” said Anchor Capital’s Casey Delport.

The SARB in July said it saw 2021 GDP growth at 4.2%, and added that it had been prevented from raising that forecast due to the impact of the July unrest.  

“The prospect of a contraction in GDP in Q3 will reinforce MPC members’ dovish stance. We expect the benchmark rate to remain unchanged at 3.50% on Thursday, and the first rate hike is likely to come much later than investors currently anticipate,” said Virág Fórizs, Africa analyst at Capital Economics. BM/DM

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