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This article published in Moneyweb Today gives some hope that we may be heading for better times in terms of inflation, which in turn will start to help the economy.

Inflation pressures may be levelling off

Patrick Cairns

 CAPE TOWN – South Africa’s headline inflation number or CPI rose to 6.3% year-on-year in June from 6.1% in May. While this keeps inflation above the South African Reserve Bank’s (Sarb’s) target range of between 3% and 6%, it was largely in line with expectations.

The increase was driven by an 11% annual increase in food prices, and petrol inflation that rose by 4.2% in June due to the recent 52c per litre increase in the fuel price. Stanlib economist Kevin Lings however suggested that these pressures may be levelling off.

“Although we still expect food inflation to increase a little further over the coming months, reflecting partly the effect of the recent drought conditions, most of the anticipated rise in food prices is now reflected in the data,” he said. “And although the petrol price rose by a further 11c per litre in July, there is currently an average daily over-recovery on the petrol price of 86c per litre. This implies that the petrol could fall sharply in August 2016, by around 90c per litre. This will help to soften earlier concern about the expected spike in SA consumer inflation during the second half of 2016.”

Lings added that excluding food and petrol, CPI comes in at 5.9% and still within the target range, while core inflation, which also excludes electricity, is at 5.6%.

“The Reserve Bank will remain concerned that core inflation is still relatively high and close to the top-end of the inflation,” he said. “This is a high risk that core inflation breaches the top-end of the inflation target in the second half of 2016, which will negatively impact inflation expectations.”

However, he suggested that he does not believe this is enough to cause the Sarb’s Monetary Policy Committee (MPC) to hike interest rates when it meets on Thursday.

“In 2015, the Sarb became concerned about a broadening of inflationary pressure and decided to start to increase interest rates,” he explained. “While this was partly in response to concerns about inflation, it also reflected their worry about South Africa’s vulnerability to foreign capital outflows should the Federal Reserve decide to start to normalise interest rates. They followed this with a further hikes of 75bps in 2016.”

However South Africa’s growth outlook is not particularly positive, and with uncertainty around the local government elections, he expects the Sarb to be cautious.

“This will encourage the Reserve Bank to remain vigilant, but not necessarily hike interest rates,” Lings said. “In other words, having already hiked rates by 200 basis points since the recent low, the Reserve Bank could afford to pause and leave rates unchanged in the short-term.

Chief economist at the Old Mutual Investment Group, Rian le Roux, agreed that despite the higher CPI number, the tough global and local economic environment make it unlikely that the Sarb will raise rates.

“While a technical recession in SA is unlikely, as incoming data for the second quarter points to a fairly decent rebound in GDP after the first quarter contraction, the economy is still weak enough that the Sarb will stay on hold,” le Roux said. “In addition, the rand has firmed up a lot since the last meeting – from just under R16 to the dollar to R14.35 to the dollar now – inflation has surprised on the downside and forward-looking inflation outcomes have improved.”

Economist at Rand Merchant Bank, Isaah Mhlanga agreed:

“Our view is that the Sarb will remain on hold at 7.0%,” he said. “We have been saying the Sarb has reached the top end of the hiking cycle for some time now, and we still hold the same view. However, given the wage negotiations and settlements that are in all likelihood going to be above inflation, the Sarb may express its discomfort with inflation expectations  which are also going to be released at the same time as the rate decision.”

This view was shared by Macquarie Securities economist, Elna Moolman:

“I expect the Monetary Policy Committee (MPC) to keep rates unchanged,” she said. “However, the Sarb’s rhetoric might still be somewhat hawkish, as the bank might be concerned that the rising, above-target inflation may lift inflation expectations and/or wage settlements.”

She added that while inflation may continue to rise in the second half of 2016, the expectation is still that inflation will come down next year.

“I forecast average inflation of 6.6% in 2016 and 6% in 2017, with inflation around 5.5% towards end-2017,” Moolman said. “The moderation is essentially a result of the expected moderation in food inflation, as well as an expectation that the price pressure from rand weakness should fade.”

Graham Tucker, the manager of the Old Mutual Balanced Fund, believes the Sarb has largely been successful in keeping inflation under control, and this is positive. He also argued that if it does decide to hike rates, this would not necessarily have a negative impact on the economy as it could encourage further foreign investment.

“While South African bonds and cash currently offer good returns, a rate hike at this time would make South Africa even more attractive to foreign investors seeking additional return in this low yield and return world,” Tucker said. “This could result in the rand strengthening further which would in turn ease pressure on the petrol price, the cost of imported goods and the inflation rate. Investments dependent on a weaker currency would remain negatively impacted, however, the local bond market would be expected to perform.”

By | 2018-02-20T07:11:49+00:00 July 21st, 2016|Blog, Business Development, Finance|0 Comments

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