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JOHANNESBURG - South African inflation quickened unexpectedly to a four-year high in July, stoking fears that interest rates may have to rise again.
The CPIX inflation rate, which the Reserve Bank of South Africa uses for steering monetary policy, rose to an annual 6.5 per cent last month from 6.4 per cent in June, wrong footing economists who had predicted a fall to 6.1 per cent.
It was the fourth straight month that the CPIX figure, which excludes mortgage costs, had stayed above the bank's 3-6 per cent target band.
Analysts said the inflation data did not bode well for the interest rate outlook, adding weight to arguments rates may not yet have peaked.
"It's a terrible number. It is kind of cementing the case for a rate hike but for all the wrong reasons - the forces driving it are generally still external," said Colen Garrow, an economist at Brait Merchant Bank.
Since June last year the central bank has raised its repo rate by 300 basis points to 10 per cent -- with the latest rise coming earlier this month -- to tackle rising inflation sparked largely by higher food and fuel costs.
Its monetary policy committee meets again in October. Statistics South Africa said food prices were the main culprit for the July increase, with food inflation jumping to 10.2 per cent from 9.5 per cent in June.
All-items inflation was steady at 7.0 per cent, while CPIX rose 1.1 per cent month-on-month and headline CPI was up 1.0 per cent month-on-month.
Bonds yields jumped after the data was released.
The yield on benchmark 2015 jumped as much as eight basis points to 8.51 per cent before retreating to 8.47 per cent at 1142 GMT -- still up 5.5 basis points for the session.
The rand was last more than a per cent stronger, also boosted by stock markets recovering earlier losses.
The faster inflation follows data on Tuesday that showed economic growth slowing to 4.5 per cent in the second quarter -- from 4.7 previously -- possibly on the back of higher interest rates.
Some analysts said this posed a problem for the central bank as it risked dampening growth further while it battled to contain inflation.
"A dilemma is brewing here. We can't keep raising interest rates because of external forces," Garrow said.
"I don't think we should be hiking interest rates, but unfortunately the Reserve Bank is not discriminating between underlying demand pressures and external influences driving it over the range."
Reserve Bank Governor Tito Mboweni reiterated last week that the Bank's mandate was to target inflation and did not extend to economic growth.
The bank is also worried consumers are still taking on too much debt to fund high demand, with year-on-year credit growth near record levels at around 25 per cent and household debt hitting a new all-time high in the first quarter of 2007.
But other analysts said it was too late to influence near term inflation with monetary policy changes.
"With signs of cyclical moderation in the economy, we still think the SARB should remain on hold, and interest rates are currently at their cyclical peak," said Razia Khan, head of Africa research at Standard Chartered.
- REUTERS
