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Interest rates cause surge in inflation
THE ECONOMY
SA is facing the prospect of a double-digit inflation rate for the first time since mid-1995 following a surprise surge in September consumer price index (CPI) data. Statistics SA said headline CPI rose 1.7% month-on-month and 9.1% year-on-year compared with a 1.1% and 7.6% rise in August. The rise was largely the result of another round of interest rate hikes, although analysts had not expected the figure to top 9%. A Reuters poll of economists had forecast a 1.2% month-on-month increase and a 8.4% year-on-year rise in the all-items index. Core inflation, which excludes food and housing, came in at a more tame 7.7% from 7.6%, offering hope that the expected interest rate cuts that have been mooted are not delayed because of the high headline figure. Analysts say Reserve Bank governor Chris Stals, eager to ensure any easing in monetary policy, does not spur inflation and entice speculators back into the currency market, may delay significant rate cuts if the CPI continues its ascent, but argue the positive outlook for a sharp fall in the inflation rate in 1999 leaves ample room to ease rates over the coming months. Standard Bank forecasts inflation will fall to an unprecedented 3% by the end of 1999. It is also clear that any cut in interest rates will have a dampening effect on headline inflation given the effect of recent rate hikes on the inflation rate. Economists say a 10%-plus inflation rate is a possibility this year, but this is likely to be short-lived as the economy is heading towards a recession (technically two quarters of negative growth) and there is little chance of domestic price pressure driving up inflation. Although the data did undermine sentiment on surprised financial markets for a short time on Thursday, the longer-term effect should be limited, with the market focusing more in coming months on the more encouraging core inflation rate. Let's hope the Reserve Bank does the same.
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