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Cape Town - The public sector wage round settlement was surprisingly low and below the "warning zone" of the SA Reserve Bank (Sarb), according to emerging markets economist Peter Attard Montalto of Nomura.
"With the April Consumer Price Index (CPI) inflation surprising us to the downside, the outlook profile has become a little softer," said Montalto.
"These factors reinforce some of the skew in rate hike risk from July to September, though July - for now - remains our baseline."
He said CPI inflation for April was always a bit difficult with the raft of post-budget tax and duty changes to filter through, though apart from that a moderately low survey month.
Headline inflation was 4.5%, below Nomura's own 4.8% forecast and market expectations of 4.6%, but up from 4.0% previously on a mixture of strong base effects, tax changes affecting petrol in particular and also sin taxes.
Core inflation fell to 5.6% from 5.7% previously, below Nomura's and market expectations for it remaining unchanged.
READ: Inflation surprise buys Sarb more time
"For us the downside surprise in headline inflation came from food price inflation still not meaningfully turning yet in non-staples - processed - of 5.3% from 6.6% in March, and there were large drops in the fats and ‘other’ food categories," explained Montalto.
"There is clearly a longer, deeper pass-through from the previous drop in staple - unprocessed - foods than previously expected by the model."
Staple foods were roughly in line with expectations showing they are now stabilising owing to good harvests.
"We now await the poor 2015 harvests to filter through - and then after to non-staples - into next year. Risks are now probably slightly to the upside on staples or unprocessed food and still to the downside on non-staples and processed food. Indeed, there were sharp rises in fruit and vegetable prices in today’s data," said Montalto.
"We think food prices will continue to dominate the non-core CPI. The biggest oil price changes look to be past and after what looks like a R0.45 per liter increase in May’s print, things should calm down on that front until there is a currency shock - or less likely an oil price shock."
