Economists had a mouth opening “wow” as inflation measured by the consumer price index (CPI), decelerated to 6.1% in May from 6.2% in April,
Economists who anticipated 6.3% inflation were surprised at the deceleration. Interestingly, one of the key areas touched by the deceleration is food.
Food inflation moderated to 10.5% in May from April’s 11% compared to the same month the previous year. Food inflation has been driven by a drought and a weaker rand.
As at May, 12c/litre increase in the petrol price and a 0.8% increase in the price of vehicles saw transport inflation rise to 3.1% and if this persists the Reserve bank’s monetary policy committee might consider ‘putting to hold, it’s repo rate at 7% by July 21.
The apex bank was widely expected to raise the repo rate from 7% to 7.25%, but now it finds itself trapped between inflation above the government’s 6% ceiling and a contracting economy.
Investec economist Annabel Bishop also noted that the Reserve Bank “may find itself in the position where it must reverse recent repo rate hikes if activity falls off materially further.
Bishop’s assertion follows Tuesday’s business cycle data from the Reserve Bank, which showed April’s leading indicator dropping 0.9% from May instead of rebounding as generally expected.
“The SARB recognizes that the business cycle is in a downward phase, beginning in December 2013, and defined as occurring when the pace of aggregate economic activity is slower than the long-term rate of aggregate economic activity.”
Meanwhile, Nedbank’s economic noted that despite the moderation in the previous two months, the inflation rate is forecast to increase in the months ahead and this would be caused by high food prices due to the effect of the drought.
“The weak rand and higher administered prices will also continue to exert upward pressure, with CPI likely to remain above the 6 % upper target until the last quarter of 2017” it said.
The bank also said the Reserve Bank would continue to face the challenge of striking a good balance between the weak economy and the poor inflation outlook. “This makes monetary policy choices difficult” it said.
The delay in US interest rate hikes, the stay of execution by the rating agencies and poor economic data reduce the chances of further monetary policy tightening in the short-term.
However, much will depend on the rand as the year progresses. For now we anticipate one more hike of 25 basis points in the second half of the year, the bank said.