Rising food prices pose risk for South Africa inflation

May 13, 2015 6:03 AM

JOHANNESBURG (Reuters) - South Africa's consumer inflation is likely to trend steadily higher this year as food prices rise, putting pressure on the central bank to increase interest rates this year, analysts say.

A shopper browses in a branch of South African retailer Pick n Pay at a mall in Soweto, southwest of Johannesburg August 4, 2014. REUTERS/Siphiwe Sibeko

Predictions of rising food price pressures began in March after grain traders warned that South Africa could start buying the grain abroad because unfavourable weather had reduced the expected 2015 harvest.

The World Food Programme (WFP) weighed in on Monday with warnings of possible food shortages in southern Africa due to a severe drought in key maize producer South Africa, which accounts for more than 40 percent of regional output.

The region would likely have to supplement domestic output with increased imports, it said.

"The risks to the food inflation trajectory, associated with the maize price increase, are firmly to the upside," Investec economist Kamilla Kaplan said in a note. This was likely to be evident from the second half of the year, she added.

Food has a 14 percent weighting on South Africa's consumer price index, and food inflation came in at 5.9 percent year-on-year in March, outpacing the overall CPI rate of 4.0 percent.

"That momentum will likely carry through going into winter, so we'll definitely start to see a push, especially given the drought affecting maize," said Bart Stemmet, an economist at research house NKC.

"It will probably go along with price pressures from rising oil and rising electricity, so all that is going to affect the food sector from input costs to having to import maize from overseas, especially given the weaker rand."

The local currency has fallen more than 4 percent against the dollar this year, adding to a decline of about 10 percent in 2015, and the central bank has said it poses a risk to its 3-6 percent inflation target.

The South African Reserve Bank (SARB) has kept interest rates unchanged since July last year, but analysts say policy tightening is inevitable in 2015, particularly as the U.S. Federal Reserve is also set to start hiking.

The SARB will hold its third policy meeting of the year next week.

"An interest rate rise can’t be too far off as soaring gasoline and food costs have started to take their toll," said Dennis de Jong, managing director at UFX.com.

"Coupled with the domestic energy provider asking for a 25 percent price increase and the rand losing value against a strong dollar ... the Reserve Bank must act sooner rather than later,” he said.