Compiled by: Richard Favis
RBC Capital Markets
+27 11 784 5065
An interest rate hike in December is now a forgone conclusion according to most market participants, following this week’s data releases.
South Africa’s consumer inflation numbers (CPIX) rose to 7.3%y/y in October, well above the 7.1% anticipated by the market and considerably outside the government’s target range of 3% to 6%. CPIX inflation gained 0.7% m/m mainly due to higher food and international oil prices.
This is the seventh consecutive month, this year that CPIX has fallen wide of the inflation target and is now expected to peak above 8% early next year and only move back within the target band towards the end of 2008.
As with the consumer inflation numbers, producer inflation came in well above market forecasts with growth in the index rising 9.5%y/y in October from 9.4%y/y previously. PPI’s acceleration was also largely driven by higher food and oil prices.
South Africa’s strong GDP growth data gave the Reserve Bank further ammunition to raise interest rates when it meets next week. GDP grew by 4.7%q/q in the third quarter compared with the downwardly revised figure of 4.4%q/q in the second quarter.
Sectors that had a significant contribution to GDP were the financial, real estate, construction and service sectors, while the wholesale and retail trade sectors had a marginal increase.
The data suggests that the economy remains fairly resilient despite the 3.5 percentage points of rate hikes since June last year.
Other economic releases this week included money supply and private sector credit extension numbers, both of which declined marginally year-on year in October, but remain comparatively high. M3 money supply recorded a 23.39%y/y rise from 24.94% in September, while credit extension rose by 22.27%y/y from 22.46% previously.
The rand fell to over R7/$ this week, as emerging market sentiment turned. It was also put under pressure, following the news over the weekend, that Jacob Zuma is likely to be the next president of the ANC political party.
Bonds took further strain this week as the market fully priced in the 50bp rate hike next week. The weaker rand added to local bond’s woes, causing the yield on the R153, due 2010, to rise by over 20bp from Monday’s open.
Next week data on vehicle sales and manufacturing numbers is released.
However the market will focus on the outcome of next week’s MPC meeting, with the rate announcement expected at 15:00 GMT on Thursday.