Interest rate cuts still some way off - economists | Fin24
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Interest rate cuts still some way off - economists

Nov 23 2016 19:10
Carin Smith

Cape Town - Interest rate cuts are likely still some way off given upside risks to the inflation profile posed by a volatile domestic currency and above-inflation nominal wage settlements, Sanisha Packirisamy, economist at MMI Investments and Savings, said on Wednesday.

This is ahead of the last interest rate announcement for 2016 by the SA Reserve Bank's Monetary Policy Committee (MPC) due on Thursday.

"Core inflation shows signs of underlying inflationary pressures, while inflation expectations by businesses and labour unions remain elevated, even over a five-year horizon, posing a risk to headline inflation," said Packirisamy.

"Despite the higher than expected inflation print for October 2016, our projections point to a decline in overall inflation from around 6.3% in 2016 to an estimated 5.6% in 2017 - largely owing to lower food prices - and a sharper fall to below 5% in 2018 - thanks to an expected appreciation in the currency in response to a mild uptick in commodity prices as the overhang in supply narrows."

She said the outlook for inflation expected to return to within the target band, coupled with low growth, suggests that the current interest rate cycle is likely near its peak.
Headline consumer price inflation (CPI) rose to 6.4% year-on-year, marginally higher than MMI's own and the market’s estimate for October 2016. In month-on-month terms, inflation increased by 0.5%, partly owing to higher food and transport costs.

Emerging markets economist Peter Attard Montalto of Nomura said on Wednesday that CPI inflation for October surprised to the upside, showing little support from the stronger rand in recent months because of the asymmetry in pass-through.

"The 5.7% for core inflation will still be uncomfortably close to the top end of the band for the MPC and hence will likely drive some of the hawkish rhetoric at tomorrow’s MPC meeting – not so much for the current level per se, but for what it shows about the long-run stickiness of core inflation and how that can drive long-run inflation," said Montalto.

"We believe the Sarb will push strongly tomorrow to look through the drop in CPI inflation in H1 and instead look to long-run Q4 2018 inflation and the stickiness in core inflation expected over the horizon. Our Q4 2018 forecast has moved up from 5.6% (which was the same as the Sarb at the last MPC meeting) to 5.8% now."
Nomura now sits at a 6.3% average for this year after 4.6% last year, 5.6% for next year and 5.7% for 2018.

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