Bank 'has leeway to show mercy on rates'

23 October 2016 - 02:00 By ASHA SPECKMAN

The Reserve Bank will have room to "look through" a breach of the inflation target band and save consumers from an interest rate rise that would hike home loans and vehicle repayments, say economists. Higher food and transport prices led inflation to breach the Reserve Bank's target band of 3% to 6% in September, according to data released by StatsSA on Wednesday.But a firmer rand to the dollar and weaker consumer spending, which was evident in retail sales this week, has strengthened the case for rate hikes to be paused.Reserve Bank governor Lesetja Kganyago indicated this week that the central bank was nearing the end of its hiking cycle. But he said this did not mean rates would be cut as the Reserve Bank wants to see inflation remaining firmly within the target range over a longer period.Tumisho Grater, an economist at Novare, said: "The Reserve Bank is experiencing the classic central banker dilemma: low and slowing growth alongside high and rising inflation."Very weak growth in August retail sales is reflecting the negative impact of previous interest rate hikes. Retail sales grew by 0.2% compared to a 1.2% rise in July.story_article_left1"[The] number is further confirmation that the impact of previous rate hikes is only now being felt and suggests no need to raise rates further," said Jason Muscat, an FNB economist.Inflation, which had slipped to 5.9% in August, rose to 6.1% in September, but this still beat a more pessimistic expectation of 6.3% from economists.High food inflation of 11% year on year was driven by higher bread and cereals and fruit prices.But food inflation moderated on a month-on-month comparison, with the rate of increase on meat and bread and cereal prices showing a deceleration.Vehicle price inflation of 9.4% in September was also creeping up to double digits and was a concern for new-vehicle sales for the remainder of the year, economists said.Petrol price inflation contracted 3.4% year on year in September. Even so, petrol prices have recently increased, rising 43c per litre earlier this month. A hike of 47c a litre in November on the back of higher oil prices is also anticipated.Increases in actual rental at 0.9% between August and September and owners' equivalent rent over the same period also contributed to higher inflation in September.Economists are, however, reluctant to forecast an end to the Reserve Bank's tightening cycle, which began in January 2014 and paused in March this year.Inflation is expected to contract next year as the effects of the drought subside. But in the meantime, risks to the rand may keep inflation out of the target band.story_article_right2Risks to the rand include political uncertainty around Finance Minister Pravin Gordhan's position and a possible hike in interest rates in the US, which could lure investors seeking higher yields away from emerging-market economies towards the dollar.It has been difficult for markets to pinpoint the timing of the US hike, which has been mooted and put off continuously over the past few months.Jana van Deventer, head of real-time analytics at ETM Analytics, said the market had priced in risk from the US Fed tightening, so much so that it was not expected to significantly impact the local economy.She said political tension appeared to be nearing breaking point as support for Gordhan swelled because fraud charges against him are widely believed to have been trumped up as part of a political ploy to oust him and expose the National Treasury to state capture by influential individuals."For the time being the political environment remains particularly fluid, which should keep the rand relatively vulnerable in the short to medium term," Van Deventer said...

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