Headline Inflation Rate Breaches the 6 per cent level

SOUTH AFRICA - In Brief 21 Aug 2013 by Iraj Abedian

---

According to figures released today by Statistics South Africa, the headline inflation rate for July 2013 recorded 6.3 per cent year-on-year, a tad higher than the market’s expectation of 6.2 per cent. Given that the South African Reserve Bank (SARB) had anticipated the headline inflation rate to breach the upper limit of its 3 to 6 percent inflation targeting range during Q3 2013, we hold the view that the Bank will remain tolerant of high inflation for now, as economic recovery hesitates. Nonetheless, the extent of the Bank’s lenience towards high inflation will be tested as the rand’s value (as well as that of other emerging market economies) experience bearish pressures. Whether the inflation rate returns within the SARB’s target on balance within Q4 2013 is partly a function of the extent of markets’ adjustment to prospects of a tightening of monetary policy in the US – with the associated increase in capital outflows from emerging market economies, including South Africa – going forward. On the other hand, high wage demands remain another key catalyst for high inflationary pressures in the South African economy. In this regard, today’s outcome will in all likelihood feature in current wage negotiations. Therefore, we expect unions to be reluctant in making considerable concessions. All in all, the emerging picture of high inflationary risks and subdued economic activity leaves the SARB in an indecisive stance for monetary policy. Be that as it may, we are of the view that inflation expectations and outcomes for Q4 2013 will provide a clearer indication of whether the SARB’s balancing act between ensuring price stability and supporting growth would tip in favor of...