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Cape Town - Indebted South Africans may breathe a sigh of relief if the South African Reserve Bank's Monetary Policy Committee decides not to hike interest rates on Thursday.
South African inflation having risen to 4.5% in April and not to 4.7% as expected has actually taken the heat off the Reserve Bank to raise interest rates at its Monetary Policy Committee (MPC) meeting on Thursday, according to global foreign exchange house Citi.
This is from 4.0% in March and the second downside surprise since the low of 3.9% in February.
"The consensus had expected 4.6% and we expected 4.7%. With food, alcoholic beverages and petrol prices rising in the CPI basket as Citi had expected, it was vehicle deflation - though only slight at 0.1% month-on-month - that surprised its April CPI forecast to the downside," said Citi.
"The April Consumer Price Index (CPI) rose to 4.5% year-on-year (y/y) which was a downside surprise to our 4.7% forecast, caused mostly by slight vehicle deflation. We don’t expect this to become a trend, however," Citi CEEMEA said in a statement on Wednesday, shortly after Stats SA announced its latest inflation data.
"We still expect a prolonged breach of 6% by year-end, remaining above 6% through 2016. This is more hawkish than the Sarb's March projections for a temporary 6% breach in the first quarter of 2016 and an average CPI forecast of 5.9% for 2016."
Citi said despite its forecast for unchanged policy rates at Thursday’s MPC meeting it still expects a more hawkish MPC and even a possible two-quarter 6% breach in the MPC's CPI estimates.
"But this would still be deemed temporary. Our baseline view remains a Fed hike in December and Sarb hike in January, but the risk of an earlier hike by the Sarb has risen given rising inflation risks like electricity tariffs, the rand and high wage demands in the gold sector and above inflation wage settlements in the public sector for the next three years," said Citi.
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"The downside CPI surprise buys Sarb some time. We forecast unchanged policy rates at Thursday’s MPC meeting. But a weak gross domestic product (GDP) outlook remains a powerful offset."
Sarb breathing space
In response to weak growth prospects and rising inflation concerns, Momentum expects Sarb to keep the key policy rate steady at 5.75% while maintaining a hawkish bias to address notable upside risks to the domestic inflation profile.
"We do not think that there is significant scope for major growth downgrades at this stage given that Sarb has already marked growth considerably lower over the course of the previous two meetings, citing binding electricity supply constraints as the main driver behind the reasonably sluggish growth outlook," Momentum said on Wednesday.
"While weak growth and uncertainty regarding electricity tariffs is likely to prevent the Sarb hiking this time around, currency volatility and wage increases continue to pose upside risks to the inflation trajectory."
Moreover, longer-term inflation expectations among businesses and trade unions, which remain anchored above the 6% upper target, remain a key risk to second-round inflationary pressures, Momentum pointed out.
As a result thereof and in spite of weak growth, Momentum expects Sarb to lift interest rates by a further 100 basis points by the end of 2016, with the next hike in rates expected in the fourth quarter of 2015.
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