Above Target Headline Inflation
In August 2013, the headline inflation rate recorded 6.4 per cent year-on-year i.e. a 0.1 percentage point increase compared to the previous month’s print. This outcome is consistent with the South African Reserve Bank (SARB)’s expectation of a temporary breach of its 6 per cent inflation targeting upper limit during the third quarter of 2013. However, the restrain – albeit marginal – in the core inflation rate is encouraging. What are the implications for monetary policy conduct? At its earlier meeting, the SARB’s Monetary Policy Committee (MPC) mentioned that it would remain forgiving of above-target inflation in the short-term. Against this backdrop and that of a bruised economic recovery (partly due to labour-related production stoppages in some sectors), we expect the MPC to keep the benchmark rate unchanged tomorrow. We also believe that risks to the inflation are on the upside due to high administered prices (e.g. electricity and fuel costs) as well as above-inflation wage settlements. On the other hand, the MPC will watch closely the Fed’s decision on whether to scale down monetary stimulus. Such a pronouncement will in all likelihood have implications for capital flow movements and therefore the strength of the rand.