December rate increase unlikely: Old Mutual Asset Managers

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

The positive surprises were the relatively small rise in food prices, up 0.1% month-on-month against expectations of a larger increase, and the month-on- month decline in medical and communication prices.

The negatives were small month-on-month rises in the tradable categories, which have been declining until now. These include clothing, footwear, furniture appliances and vehicles. Given its concern that high oil prices may translate into second-round inflationary pressures, the SA Reserve Bank is likely to keep a close eye on these figures, says Els.

As a result of these relatively subdued inflation figures, Els' inflation forecast has improved for the second month in a row. He expects inflation to peak at 5% in February 2006 versus the 5.2% peak he anticipated before the figure was released.

"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".

In the build up to release of the figures, the money market had already started discounting the lower probability of a rate hike in December, with negotiable certificates of deposit rates coming off 10 basis points the day before.

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.

Key drivers for inflation going forward remain rand, oil and food.