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Most economists dovish after inflation comes in at 5.4%

January 23, 2014

The inflation rate last month rose less than economists predicted as growth in food prices eased, reducing investors' expectations of an interest rate increase this year. The annual rise in the consumer price index (CPI) ticked up to 5.4 percent in December from 5.3 percent in November, Statistics SA said. Economists in a Bloomberg survey had expected a figure of 5.6 percent. The CPI rose 0.3 percent month on month. Most economists said yesterday that they expected no hike in interest rates this year because CPI inflation would remain in the Reserve Bank's target range between 3 percent and 6 percent. However, Vunani Securities predicted the repo rate would be raised by 50 basis points to 5.5 percent in November. Annabel Bishop , the group chief economist at Investec, said higher rentals and domestic wages and the 17c-a-litre petrol price hike last month had raised the annual inflation rate only marginally. She said this lowered the upward trajectory of the CPI. Bishop said this month's 38c-a-litre rise in the petrol price would not exert material upward pressure on CPI. A rise of 31c a litre was in the offing for next month, which would exert moderate upward pressure. "We continue to expect no hike in interest rates in 2014 as CPI inflation will remain within target, economic growth will remain below potential and inflation expectations will subside to reflect this." Kamilla Kaplan , another economist at Investec, said the Reserve Bank's monetary policy committee (MPC) would meet next week to deliberate on interest rates and the exchange rate was likely to be highlighted as an upside risk to inflation. "Since the MPC last met in November, the rand has weakened 7 percent against the dollar. However, the effects of a weakening domestic demand environment and, concurrently, suppressed growth in private sector credit extension will keep inflation in the target band in 2014 and 2015. "Interest rates are likely to remain unchanged in 2014 as economic growth remains sluggish and downside risks are yet to dissipate." Citi Research said on Monday that inflation expectations, particularly those surveyed by the Bureau for Economic Research (BER), were key to the Reserve Bank's decision. Citi said: "In the fourth quarter of 2013, the survey affirmed that inflation expectations were anchored… BER noted that never in 13 years of the survey have expectations been as steady. "This, together with [a] downside surprise in monthly CPI expectations, means little urgency for imminent monetary policy tightening." Ilke van Zyl , an economist at Vunani , said the December inflation data had no bearing on her interest rate view. "We are still of the opinion that the policy interest rate will be hiked by 50 basis points in November. While we acknowledge South Africa's weak growth fundamentals, there are still too many risks to the inflation outlook to fathom any other direction besides up" for the repo rate. She expected inflation to rise steeply in the second quarter, mainly due to developments in the food industry, before peaking at 6.4 percent in June. "There is a rising possibility of inflation decelerating fast after increasing to a peak of around 6.4 percent as consumers succumb to all the rising pressures on their finances. "While we expect a further slowdown in 2015, this is heavily premised on our forecast of an interest rate hike in November 2014 , which should see the rand shake off its weakening bias." Additional reporting by Bloomberg The Star

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Source: Star, The (South Africa)

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