Unlikely

OMAM sa and Investment Solutions economists say the signs are good...

It is unlikely that the Reserve Bank will raise rates in December after consumer price inflation figures came in below expectations today, says Old Mutual Asset Managers economist Johann Els.

"While there is still a risk of an interest rate hike next year, today's inflation rate was much lower-than-expected due to a number of positive surprises in the figures."

Domestic inflation data announced today (23 November 2005) reinforces the bullish view of Martin Jankelowitz, head of market and economic research at Investment Solutions, that interest rate hikes in South African should still be avoided.

“Disinflation remains prevalent in South Africa and, furthermore, real interest rates remain high relative to the rest of world,” he said.

Consumer price inflation excluding mortgages (CPIX) came in at 4.4% versus the 4.6% OMAM, and consensus, expectations.

“Evidently the South African government is serious about promoting economic growth and the current economic environment in South Africa is not creating any internal imbalances which need to be urgently addressed,” said Jankelowitz.

OMAM’s Els: "The outlook for inflation looks much better after these figures," he says. "With the peak likely to be lower-than-expected previously, this will have a positive impact on interest rate decision-making.

“Risks of a December hike have further been softened by the firmer rand over the past few weeks, oil has remained at its recent softer levels and there are some tentative signs of at least some moderation in the pace of domestic demand growth.”

Els says the authorities will still be on the look out for the second-round effects of higher oil prices but, with oil having eased off since the hurricanes hit the US in August and September, the pressure on the running costs category in the consumer inflation figures has eased for now.

Jankelowitz believes that inflationary pressures created by the oil price are temporary and will work their way out of the system in due course.

“The likely petrol price decrease of around 30c/litre at the beginning of December will moderate domestic inflationary pressures - particularly from the transport sector - and this is likely to have a positive impact on food prices going forward.”