Another rates hike likely

THE main inflation gauges may have accelerated last month, reflecting a sharp fall in the rand and raising prospects of further interest rate increases this year, according to a Reuters poll.

The Reserve Bank raised its key repo rate by 50 basis points to 7,50% on June 8, warning that the inflation outlook had worsened, with the targeted CPIX measure seen breaching the upper end of its 3% - 6% band in the first quarter next year.

The survey of 14 economists published today forecast that the CPIX index would quicken to 4,1% in the year to May from 3,7% in April. The data are due for release next Wednesday.

"The inflation outlook is changing with the depreciating rand. It mitigates the bank’s decision to hike interest rates," said Magan Mistry, an economist at Nedbank.

The Reserve Bank expects the CPIX index, which has remained inside its target band for 32 consecutive months, to peak at 6,2% in the first three months of next year.

Economists said the rand’s sharp slide, which started on May 11 following a rout on emerging markets, had raised the probability of more rate hikes this year.

The rand has depreciated by 15% versus the dollar since May 11, wiping out its earlier gains this year. It was trading around R7,09 to the dollar today and has fallen about 10% against the US currency so far this year.

"Looking at the currency there are some inflation pressures that are going to come through. It indicates that rates may be raised again this year due to the perceived risk to the inflation target," said Nico Kelder, economist at Efficient Group.

Rand weakness saw petrol prices raised by 6,8% last month. That increase, together with strong food prices, may have lifted the monthly CPIX rate to 0,6% from 0,4% in April, the survey showed.

"Over the past year, high oil prices did not significantly increase inflation, but with the weaker rand, the pass through may be greater and this is what the Reserve Bank may be fearing," said Kelder.

Economists said data releases and the exchange rate will be key to the timing of the next interest rate hike.

Other factors likely to cause further tightening in monetary policy include robust domestic demand and a worsening current account deficit.

Data due tomorrow will probably show that demand for credit by the private sector remains too strong.

"I don’t think the 50 basis points (hike) makes much of a difference," said Noelani King-Conradie, an independent economist.

"They are probably going to have to raise again to make an impact. When, is the difficult part, but I am fairly confident that they will raise again."

The survey forecast credit demand growth at 22,8% in the year to May from 23,17% in April. Money supply growth was seen little changed at 23%.

The trade balance is forecast to show a R1,9bn last month, narrowing from April’s R2,4bn shortfall.

Article from : www.netassets.co.za