South African Inflation Rate Climbs to One-Year High of 5.2%

  • Rand's plunge to record low is key risk to price-growth
  • Inflation adding to pressure on central bank to raise rates

South African inflation accelerated to a one-year high of 5.2 percent in December, adding to pressure on the central bank to raise interest rates next week even as economic growth is set to slump.

The inflation rate rose from 4.8 percent in November, Pretoria-based Statistics South Africa said on its website on Wednesday. Last month’s figure was in line with the median estimate of 22 economists surveyed by Bloomberg. Prices rose 0.3 percent in the month.

The rand’s 21 percent plunge against the dollar in the past three months and the worst drought in more than a century is fueling inflation, threatening the central bank’s 3 percent to 6 percent target band. That may give the Reserve Bank reason to take a more aggressive approach on Jan. 28 and raise the benchmark rate by more than 25 basis points.

“We are starting to see more evidence of building food-price pressures in particular, given the local drought conditions, and it will obviously be of concern to the Monetary Policy Committee in its deliberations next week,” Jeffrey Schultz, an economist at BNP Paribas South Africa, said by phone on Wednesday. “With numerous downgrades to growth forecasts they will be in a pretty tight bind.”

The rand was 0.3 percent weaker at 16.8392 per dollar as of 1:19 p.m. in Johannesburg, taking its decline since the start of the year to 8 percent. Yields on rand-denominated bonds due 2016 fell 3 basis points to 9.72 percent.

Core Inflation

The International Monetary Fund on Tuesday cut its economic growth forecast for South Africa by almost half to 0.7 percent amid a slump in commodity prices and a slowdown in the nation’s biggest export market, China. Barclays Africa Group Ltd. this week cut its 2016 GDP growth forecast for South Africa to 0.9 percent from 1.4 percent.

Retail sales rose 3.9 percent in November compared with growth of 3.4 percent the previous month, the statistics office said in a separate report on Wednesday.

Seven of the 12 economists surveyed by Bloomberg predict the Reserve Bank will raise the repurchase rate by 50 basis points from 6.25 percent. One analyst predicts no change and the rest expect a 25 basis-point increase.

The oil price has more than halved since December 2014, helping to limit gains in inflation even as the rand weakened. Core inflation, which excludes food, non-alcoholic beverages, gasoline and electricity costs, quickened for the first time since May, reaching 5.2 percent in December. Excluding gasoline costs only, the inflation rate rose to 5.6 percent.

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