Lower than expected CPI could sway interest rate decision

Luigi Marinus, Portfolio Manager at PPS Investments.

With the consumer price index (CPI) coming in lower than expected for August 2018, all eyes will be on the South African Reserve Bank (SARB) ahead of the interest rate announcement.

The year-on-year (y/y) CPI increased by 4.9% in August 2018, which is 0.2% lower than the 5.1% increase recorded for July 2018. There was very little change to the level of contributions to inflation on a sub-group level. The most interesting development, was the level of price increase for water and other services (11.2% y/y), as well as fuel for private transportation (23.6% y/y). Together, these make up 7.74% of the inflation basket. These large increases, which are arguably top of mind for many consumers, may explain the surprise at the lower than expected CPI.
 
The effect of this new inflation information will be an important consideration for the South African Reserve Bank (SARB), as markets are pricing in the expectation of at least a 25-basis point increase to short-term rates. Contemplating the balance between inflation concerns, recent rand weakness, increasing global interest rates and the SA consumer caught in a technical recession will make the SARB decision on interest rates a difficult one.