Although South Africa's current inflation problem is largely beyond the control of national monetary authorities, and is being driven by global supply-side price pressures on imported food, oil and other commodities, rising inflation expectations are creeping into wage demands and threatening current labour agreements.

This is the view of global analysts Moody's Economy.com, in a research note issued on Friday.

"Authorities will be increasingly challenged in coming months to ensure wage-based inflationary pressures remain contained, and to limit the second-round inflation effects amid escalating social unrest - highlighted by recent violent attacks on foreign businesses and workers in some parts of the country," they say.

The analysts say inflation is likely to continue increasing, resulting in another interest rate hike.

Another 50bp rate hike expected

Moody's adds that comments from Reserve Bank officials indicate that another 50 basis point rate increase is expected at the next central bank's Monetary Policy Committee meeting in June.

Statistics South Africa is due to release its latest consumer price index and producer price index data for April next week. "Fresh CPI and PPI numbers next week are expected to show inflation accelerated in April, fuelled by food and oil prices," says Moody's Economy, adding: "April's consumer prices report will show inflation has run above the SARB's three percent to six percent target range for 13 straight months."

And the leaner times are set to continue, the analysts predict: "CPI inflation is likely to remain above the central bank's target through most of 2009."

Next week's release of the first-quarter national accounts is expected to confirm that growth is starting to flag in Africa's largest economy, due to the tighter conditions.

GDP growth is expected to slow down

"Annual GDP growth is expected to slow down to about four percent in the first quarter, and to flag further in coming quarters," say the analysts.

They add an additional concern around interest rates.

"SARB officials have also flagged their concerns about the potential inflationary threat from excessive liquidity. Despite the global credit crunch, South Africa is still awash in cash, with annual money supply growth and credit extension running above 20 percent, four or five times the pace of economic growth," they say.

Despite higher borrowing costs and the introduction of lending restrictions last year, consumer spending and demand for credit show surprising resilience.

"A solid case can be made that higher interest rates may still be needed to rein in spending and credit; thus, another rate hike is likely in the cards for June," conclude the analysts.

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