Increase inevitable after inflation breached state target

Robert Laing

Robert Laing

An interest rate increase looks inevitable next Thursday after the reserve bank's monetary policy committee meeting now that inflation has breached the government's 6percent limit.

Statistics South Africa yesterday reported that last month's consumer price index excluding mortgages (CPIX), which is the key gauge used by the reserve bank to measure inflation, was 6,3percent up from April last year.

Inflation was expected to hit a peak this month because the government's petrol price regulators introduced the highest fuel price increase in South Africa's history of 69c a litre.

But the consensus among economists was that it would not drastically exceed the 6percent limit under which Reserve Bank Governor Tito Mboweni has been instructed to hold inflation.

This is the first time inflation has breached the government's targets since August 2003.

"It's a shocker and I think with that number, one interest rate hike won't be enough - it will have to be two," T-Sec economist Mike Schussler said.

Jeff Gable, head of research at Absa Capital, said: "The rise in core inflation in particular will make it difficult for the reserve bank to argue that the problem is simply a food and fuel problem and we now believe that a rate hike will be announced next Thursday."

The disappointing CPIX figure caused the rand to weaken against other currencies.

"Interestingly, the currency has so far seen little benefit from this more aggressive rates outlook," Gable said.