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Inflation reprieve unlikely to lead to rate cuts - economists

Apr 19 2017 17:26
Liesl Peyper, Fin24

Cape Town - Although South Africa's inflation rate was below expectations in March 2017, it remains uncomfortably high, which means interest rate cuts later this year are unlikely to materialise.

This was the view of Jason Muscat, FNB senior industry economist. “We now expect interest rates to remain flat throughout the forecast horizon,” he said in response to the latest consumer inflation data released on Wednesday.

Statistics South Africa announced earlier on Wednesday that CPI eased to 6.1% in March 2017 from 6.3% in February 2017. The consumer price index increased by 0.6% month-on-month in March 2017.

Rand wildcard

Jeffrey Schultz, economist at BNP Paribas said although the scope for interest rate cuts later this year has lessened in the wake of the on-going political turmoil in the country, he still thought it possible for the South African Reserve Bank (SARB) to maintain a slightly more “dovish bias” (unlikely to take aggressive action) over the coming months, particularly as the current 5.9% CPI forecast in 2017 looks likely to be revised down further. 

“Of course the rand remains the wildcard here, though we think that a more compelling real rates story later this year is likely to help shield the currency from further significant weakness in response to the on-going ‘messy’ political environment,” Schultz said.

Sanisha Packirisamy, economist at Momentum Investments, expects inflation to ease from current levels as food disinflation and previous currency tailwinds provide further relief in the coming months. 

"Despite disruptive politics triggering a sovereign downgrade to sub-investment grade, the rand continues to trade as the third best performing currency on a one-year rolling basis," she said. 

"However, rand risks remain to the upside." 

Packirisamy said even though Momentum Investments projects inflation to reach close to 5% on average in 2018, scope for interest rate cuts are limited and she therefore expects the SARB to keep interest rates unchanged in the coming quarters. 

The SARB's Monetary Policy Committee has kept interest rates steady at its most recent meeting on March 30 with the repurchase rate, the interest rate at which the SARB lends money to commercial banks, at 7%, and the prime lending rate, the rate at which banks lend money to consumers, at 10.5%. 

Inflation has been outside the range for seven months and the bank forecasts it will slow to less than 6% in the second quarter of the year. The change of an interest rate decrease in South Africa is limited even as the policy-tightening trajectory may be over, the bank said on April 11.

READ: Perfect storm brewing for petrol price, repo rate shock

Economic gains lost 

The South African economy was in good shape in March, with the rand strengthening to R12.43 to the dollar after three months of gains against the greenback.

However, President Jacob Zuma's Cabinet reshuffle on March 31 saw the rand lose these gains overnight and also resulted in rating agencies S&P and Fitch downgrading the country's sovereign rating to non-investment grade.

In Wednesday's announcement, Statistics SA said in March the CPI for goods increased by 7.0% year-on-year (down from 7.1% in February), and the CPI for services increased by 5.4% year-on-year (down from 5.6% in February).   

Food and non-alcoholic beverages decreased from 1.7 percentage points in February to 1.5 percentage points in March. The index increased by 8.7% year-on-year. 

Transport increased from 1.0 percentage point in February to 1.1 percentage points in March. The index increased by 7.7% year-on-year.

Packirisamy said an 8c/litre drop in petrol prices in March drove down private transport costs by 0.5% month-on-month. A further 20c/litre cut is expected to provide some relief in April 2017, taking into account a fuel price drop, which was partly offset by a 30c/litre increase in the general fuel levy and a 9c/litre increase in the Road Accident Fund (RAF) levy. 

However, recent adverse movements in the rand are pointing to a 55c/litre under-recovery in the fuel price for May this year.

READ: Petrol price hike will bite consumers - economist

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stats sa  |  interest rates  |  inflation  |  sa economy

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