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Although the latest inflation figure is lower than was expected, indicating that consumers have had more spending power, analysts say another interest rate cut is unlikely.
Although the latest inflation figure is lower than was expected, indicating that consumers have had more spending power, analysts say another interest rate cut is unlikely.

Inflation dip ‘no signal for rate cut’

ECONOMIC NEWS

By Sunita Menon - Apr 19th 2018, 12:04

Although the latest inflation figure is lower than was expected, indicating that consumers have had more spending power, analysts say another interest rate cut is unlikely. 

Inflation fell to a seven-year low in March, moving further below the midpoint of the Reserve Bank’s target range of 3%-6%, slowing to 3.8% from a year earlier. Inflation was at 4% in February.

The strengthening of the rand, which ended February 10.6% above its prior-year level versus the dollar, “has helped to alleviate inflation pressures”, said Sarah Quinlan, Mastercard senior vice-president and group head of market insights.

The lower inflation rate has supported consumers’ purchasing power. Retail sales performed better than expected in February as well on declining inflation, increasing 4.9% year on year (R80.3bn) after a 3.2% year-on-year increase in January (R78.1bn).

While the anticipated value-added tax (VAT) hike “may have boosted consumer spending in March”, it could “add to inflationary pressures in months to follow”, Quinlan said.

In March, the Bank cut interest rates by 25 basis points to 6.5%, in line with expectations. This came after a surprise interest rate cut was last announced in July 2017.

“The outlook for consumer spending has improved in recent months on the back of lower interest rates and improving consumer confidence,” Nedbank economist Isaac Matshego said. Recovery in the sector was expected to dwindle as economic growth remained slow and job prospects weak, he added.

Despite inflation nearing the bottom of the target range, analysts say another interest rate cut is unlikely as the monetary policy committee (MPC) is expected to keep the repo rate on hold. The Bank has said it is not embarking on a rate-cutting cycle despite a lower inflation outlook and expectations of higher growth.

“We expect that headline inflation will pick up in April due to a VAT rise and higher municipal energy tariffs,” Capital Economics economist John Ashbourne said. “Given increasing inflationary pressures, we expect that policy makers will keep their key rate on hold at their MPC meeting in May.”

Tsitsi Hatendi-Matika, head retail investment specialist at Absa Wealth and Investment Management, expects a 0.6% increase in the consumer price index for the year to the end of March 2019 along with the increase in VAT rate.

NKC economist Elize Kruger said the Bank’s most recent repo rate cut would boost the economy towards growth and employment creation and go some way to help offset the effect of the VAT hike on middle-income households.

They forecast no further cuts, “but interest rates could remain unchanged at this level for a prolonged period”, she said.
© BusinessLIVE MMXVIII 

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