Johannesburg – With inflation easing below the target band to 5.3% in April, analysts expect the Reserve Bank to keep rates unchanged at 7%.
The consumer price index released on Wednesday by Statistics South Africa shows that inflation is the lowest it’s been since December 2015.
READ: Inflation drops in April
The South African Reserve Bank’s (SARB's) monetary policy committee (MPC) is set to make its interest rate announcement on Thursday. Analysts do not expect a cut and are confident that rates will be kept on hold. However, they are concerned about persistent currency risks which have a bearing on the inflation outlook.
These include the US Federal Reserve’s hiking cycle as well as the ANC elective conference to be held later this year, explained Mamello Matikinca, senior economist at FNB.
Momentum Investments (MMI) economist Sanisha Packirisamy echoed views that financial stability risks may continue to threaten the domestic financial system. Besides the Fed’s hiking cycle, lower commodity prices driven by a dip in demand in China have also come to the fore. Additionally, further downgrades of the sovereign rating could threaten rand strength.
These factors continue to have a bearing on the inflation outlook, even if the Reserve Bank decides to lower its inflation projections from 5.9% for this year and 5.4% for 2018, she explained. If the rand weakens, inflation expectations could pick up again.
The local unit however has been on a rally following rumours that the ANC's National Executive Committee (NEC) plans to discuss a motion of no confidence in President Jacob Zuma. The rand traded as low as R12.98/$ earlier on Wednesday.
ALSO READ: CPI, Zuma rumours push rand under R13/$
MMI does not anticipate rate cuts soon, given the political noise impacting the inflation outlook as well as low economic growth.
Citi Research is of the view that the inflation drop could lead to calls for rate cuts. However, the SARB won’t make this move too soon given global volatility and local political and policy uncertainty.
Citi expects SARB to lower its inflation outlook. It also sees May inflation rising due to the 49 cents a litre fuel price hike, but declining food inflation could offset this.
Citi also expects the SARB to lower its growth forecast.
FNB, MMI and Citi each projected inflation to average at 5% by 2018.