The monetary policy committee (MPC) of the Reserve Bank of South Africa holds its policy meeting this week and it will probably focus on consumer inflation, which is trending higher this year fuelled by higher food and oil prices, as well as rand depreciation.
Inflation is expected to breach the 5 percent level in June, likely prompting the Reserve Bank to increase interest rates in July, according to analysts.
Investec economist Annabel Bishop wrote in a note last week that she expected the MPC to keep its repo rate unchanged.
Forecasts of rising food price pressures began in March after grain traders warned that South Africa could start buying the grain abroad because unfavorable weather had reduced the expected 2015 harvest.
Food has a 14 percent weighting on the consumer price index (CPI), and food inflation came in at 5.9 percent year on year in March, outpacing the index rate of 4 percent.
The rand has fallen more than 4 percent against the dollar this year, and the Reserve Bank has said it poses a risk to its 3 percent to 6 percent inflation target. It has kept interest rates unchanged since July, but analysts say policy tightening is inevitable this year, particularly as the US Federal Reserve is also set to start hiking.
Inflation to Remain
The Reserve Bank has said it expects inflation to remain well within the target range this year and expects a temporary breach of 6.7 percent in the first quarter.
“An interest rate rise can’t be too far off as soaring petrol and food costs have started to take their toll,” Dennis de Jong, the managing director at UFX.com, said. “Coupled with the domestic energy provider asking for a 25 percent price increase and the rand losing value against a strong dollar… the Reserve Bank must act sooner rather than later.”
However, this notion was dismissed by Lesetja Kganyago, the governor of the Reserve Bank, in an interview with the Financial Mail last week. He said inflation would need to rise above the bank’s target range over a long period before it would consider raising interest rates.
In a recent research note, Econometrix chief economist Azar Jammine, said June inflation could be above 5 percent, purely on account of oil prices.
He said the May petrol price had been left unchanged because the oil prices in early April were significantly lower than they had been in March. However, if current oil prices remained at around $65 (R764) to $67 a barrel and the rand/dollar exchange rate were to continue to hover close to R12, South Africans could be in for a petrol price hike of more than 50 cents per liter in early June.
