CPI rises to 5.3% in July

Wednesday, August 24, 2011

Pretoria - The Consumer Price Index (CPI) rose to 5.3% ahead of market expectation, Statistics South Africa (Stats SA) said on Wednesday.

Standard Bank economist Shireen Darmalingam said the figure came out slightly higher than the 5% analysts had forecasted.

Stats SA said on average, prices increased by 0.9% between June and July 2011. This was mainly due to an increase in electricity prices (which increased by 16%) and an 8.7% increase in water and other services, among others.

In June, CPI rose to 5%.

"Inflation is expected to edge close to the upper target during the course of the year," said Darmalingam.

This was also a view shared by Nedbank economist Carmen Altenkirch.

"Inflation is expected to rise further in the coming months due the low base established this time last year," she said, adding that past rises in international food and fuel prices are still expected to push inflation to the upper limit of the target band in the final quarter of 2011.

The inflation target band is between 3% and 6%.

On deliberations of the Reserve Bank's Monetary Policy Committee meeting on interest rates scheduled for next month, Darmalingam said the country's fate is in the hands of international developments.

"Our forecast is that interest rates will remain unchanged until the third quarter."

The repo rate is at a 30-year low of 5.5%.

"As was said by the governor yesterday, the bank will react accordingly to developments."

Speaking to the US Chamber of Commerce in South Africa on Tuesday, the governor said the local economy will not be immune to global developments. She said monetary policy has remained relatively accommodative. South Africa, the governor said, will respond accordingly to a global downturn.

"In the event of a significant global downturn, monetary policy will react appropriately," said Darmalingam.

"Much now depends on what happens globally and how this filters through to the domestic economy. In our central scenario, global growth slows further and commodity prices ease off, reducing a significant source of pressure on domestic inflation. Weaker global growth will curb domestic demand, keeping employment growth subdued and eroding consumer confidence," explained Altenkirch.

Nedbank expects inflation to fall back below 6% in the second quarter of 2012.

"This will probably not perturb the MPC too much in the upcoming meetings. Rather, the MPC's focus will be on developments abroad and how this might impact the domestic economy. With growth both domestically and overseas under threat, the MPC will not be in a hurry to hike interest rates. Should the global economy slip back into recession a cut in rates may even be considered. For now, we are maintaining our view of unchanged rates until May 2012," said Altenkirch.

The MPC will begin its two-day meeting on 20 September.

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