Slight drop in inflation should mean repo rate will remain unchanged

22 June 2016 - 12:39 By Robert Laing
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A vegetable and fruit vendor takes a break at the Early Morning Market in Durban. Soaring food prices — thanks to the drought gripping South Africa — are starting to pose a serious risk to inflation, with the accompanying pressure on the Reserve Bank to raise interest rates
A vegetable and fruit vendor takes a break at the Early Morning Market in Durban. Soaring food prices — thanks to the drought gripping South Africa — are starting to pose a serious risk to inflation, with the accompanying pressure on the Reserve Bank to raise interest rates
Image: AFP PHOTO

Inflation‚ as measured by the consumer price index (CPI)‚ decelerated to 6.1% in May from 6.2% in April‚ surprising economists who had expected to rise to about 6.3%.

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.

May’s 12c/litre increase in the petrol price and a 0.8% increase in the price of vehicles saw transport inflation rise to 3.1%.

The slight drop in inflation will probably prompt the Reserve Bank’s monetary policy committee to hold its repo rate at 7% on July 21. The central bank was widely expected to raise the repo rate from 7% to 7.25%‚ but now finds itself squeezed between inflation above the government’s 6% ceiling and a contracting economy.

Following 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‚ Investec economist Annabel Bishop wrote in a note the Reserve Bank “may find itself in the position of having to reverse recent repo rate hikes if activity falls off materially further.”

“The SARB recognises 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.”

– TMG Digital/BDlive

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