Inflation shock fuels rate hike talk

By Staff Writer

From Business Report

April 24, 2008

By Ethel Hazelhurst

The market was reacting to the increased chance of a further interest rate
hike, which would reduce the economy's growth potential and therefore
company profits.

Ian Cruickshanks, the head of strategic research at Nedbank Capital, said
the all share index lost the day's gains in the two hours after Statistics
SA released data on the March consumer price index (CPI) and CPIX (CPI less mortgage costs).

"The [all share] was nearly 1 percent up on the day when the news came at
11.30am, but by lunch time it was marginally down on the day," he said.

"And the banking index was down 2 percent."

Banks are particularly sensitive to rising interest rates.

The all share index closed virtually flat at 31 741 points, just 0.1 percent
up on the day, while the banking index lost 0.7 percent.

Stats SA reported that CPI rose 10.6 percent year on year last month, the
biggest gain since January 2003, when it rose 11.6 percent. And CPIX inflation
came in at 10.1 percent, the fastest rate since the 10.8 percent of November
2002. It has breached the 6 percent ceiling of the central bank's target range
for 12 consecutive months.

The CPIX figure was well up on the median prediction of 9.7 percent from 18
economists polled by Bloomberg.

In light of the latest figure, the money market anticipates that the Reserve
Bank's monetary policy committee will lift the repo rate by 50 basis points at
its next meeting in June, according to Cruickshanks. The bank has already raised its official rate from 7 percent in June 2006 to 11.5 percent this month.

Food again played a major part in the acceleration, with CPIX food inflation at
15.6 percent last month. Much of the inflationary impetus came from abroad.

Based on the average spot maize price, Standard Bank said domestic prices had risen only 5 percent this year and 40 percent since the start of last year,
while the maize price on the Chicago Board of Trade "has accelerated much faster in the midst of an international food price crisis".

The bank said some relief would come from South Africa's "bumper maize crop this year of some 10.7 million tons - the highest in three years".

However, it said, current production levels were unsustainable "given the
relatively low export parity prices and high input costs. As an average 100 litres of diesel is consumed for every hectare of maize produced, farmers are already paying R213 more for diesel per hectare since the start of the year, while the spot price of maize has only risen by an average R87 a ton over this period."

Cruickshanks said the maize price quoted in Chicago this week was up by 87 percent from last July.

Fuel also contributed significantly to higher overall prices.

Kevin Lings, an economist at Stanlib, said: "Vehicle running costs rose 5.6 percent month on month, which reflects mostly the 61c a litre increase in the petrol price in March."

He said a further price increase of about 20c a litre was expected next month. In the 12 months to March, vehicle running costs were up 27 percent.

A few components of the index are still experiencing price declines. Last month vehicle prices fell 0.3 percent from February and 0.6 percent over the 12 months. A Stats SA official said the figure was influenced by lower prices of used cars.

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