CPI Bets Above 6% Keeps Pressure on South African Reserve Bank

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South Africa's Inflation
Employees load shopping bags with a customer's purchases at the check-out desk of a Shoprite Holdings Ltd. supermarket in Johannesburg. Rising gasoline, power and food costs are adding to pressure on inflation, reversing some of the benefits from an almost halving in oil prices last year. Photographer: Dean Hutton/Bloomberg

Investors’ expectations of South African inflation exceeded the 6 percent upper limit of the central bank’s target range for the first time this year, giving the Reserve Bank reason to tighten monetary policy.

The yield difference between five-year fixed-rate bonds and similar-maturity inflation-linked securities, a measure of price expectations over the period known as the break-even rate, exceeded 6 percentage points on April 20, the first time since Dec. 30. Investors have moved up their expectations for the first interest rate increase by about a month to August.

Rising gasoline, power and food costs are adding to pressure on inflation, reversing some of the benefits from an almost halving in oil prices last year. Deputy Governor Daniel Mminele said on April 19 the deterioration in the inflation outlook has reduced the central bank’s flexibility on rates.

“Higher fuel prices, food price pressure, administrative prices and electricity tariffs, which might increase more than initially anticipated, can create a perfect storm for inflation going into 2016,” Elize Kruger, an economist at KADD Capital, said by phone from Johannesburg on Tuesday. “The forward-looking Reserve Bank will not like that.”

A government report on Wednesday showed inflation accelerated to 4 percent in March from a four-year low of 3.9 percent in the previous month. The central bank’s goal is to keep inflation within a range of 3 percent to 6 percent.

Inflation Forecasts

While the Monetary Policy Committee has kept the benchmark rate unchanged at 5.75 percent since July, Mminele said in his speech in Washington at the weekend that policy makers have less room to continue keeping borrowing costs on hold. The MPC raised its inflation forecast for this year in March and said consumer-price growth will breach 6 percent in the first quarter of 2016.

“Earlier this year we felt that short-term dynamics allowed for a pause on the interest rate normalization path,” Mminele said. “There is now reduced flexibility in this regard.”

Forward-rate agreements, used to speculate on interest rates, are pricing in a 25 basis-point increase in four months’ time. Two weeks ago they signaled an increase in September.

South Africa has boosted gasoline costs by a total of 25 percent in the past two months as oil prices started to recover from an almost six-year low on Jan. 13 and fuel levies were raised.

Electricity Tariffs

The Reserve Bank’s inflation forecast is based on an electricity tariff increase of 11.6 percent and not the latest request from power utility Eskom Holdings SOC Ltd. to raise prices by 25 percent.

That could be a “fly in the ointment” and give “a significant upward boost to the inflation profile,” Matthew Sharratt, an economist at Bank of America Merrill Lynch in Cape Town, said by phone on April 20. “Clearly, the Reserve Bank is worried about this.”

A weakening rand has also offset some of the earlier benefits of the oil-price decline, Mminele said. The currency has slumped 4.8 percent against the dollar this year and was trading at 12.1293 as of 2:32 p.m. in Johannesburg on Wednesday. Yields on government rand bonds due December 2026 fell three basis points to 7.93 percent.

“The Reserve Bank can’t sit back until it’s too late,” Thabi Leoka, an economist at Renaissance BJM Securities, said by phone from Johannesburg. “If they deem inflation to be above threatening levels for most of next year, we’re likely to see an increase of rates.”

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