Inflation is contained and an interest rate rise is unlikely, say analysts
By Sunita Menon and Karl Gernetzky - Jul 19th 2018, 10:13
The Reserve Bank could take a more hawkish stance, though, as a weakening currency puts upward pressure on inflation.
South African consumer inflation reached its fastest pace so far this year in June, after higher fuel prices stoked transport costs, limiting room for the Reserve Bank to consider cutting its benchmark rate.
The annual inflation rate was 4.6% compared with 4.4% in May, Statistics SA said on Wednesday.
The rand had its worst month in more than two years in June as the US and China exchanged tariff blows at a time when the prospect of rising American rates also weighed on emerging market assets. The weaker currency and higher oil prices added upside risks to inflation.
The inflation rate has exceeded the 4.5% midpoint of the Bank’s target range of 3%-6% for the first time since December. The monetary policy committee has made it clear it also prefers to see expectations for future inflation close to 4.5%.
Repo rate at 6.5%
But, despite the acceleration, inflation remains well contained in the target range, and analysts expect rates to remain unchanged at 6.5%.
The JSE was flat on Wednesday ahead of the Bank decision, with interest rate-sensitive stocks, including banks and retailers, mixed. Banks were firmer, despite a slightly weaker rand.
Meanwhile, retail sales have also pointed to a weaker economy, which will also discourage the Bank from embarking on interest rate hikes.
May’s retail sales growth recovered to 1.9% from April’s sharp slowdown. However, the three-month seasonally adjusted figure, used to calculate GDP, for May, came to a negative 0.1%.
This has further fuelled arguments that SA is headed for its first recession since the start of the financial crisis.
"The data is still extremely weak against the backdrop of high wage settlements and well-contained inflation, and it seems hopes of a consumption-led economic recovery are fading," said FNB senior economic analyst Jason Muscat.
He said inflationary pressure was coming from the exchange rate and the oil price-sensitive component. This saw the Bank adopt a more hawkish tone at the last meeting of the monetary policy committee.
There is also an inability to pass costs on to the consumer. An interest rate hike would put additional pressure on the economy, Muscat said.
Weak economic data released over the past few weeks signals that there are limited demand-driven pricing pressures that have resulted in lower inflation said NKC economist Elize Kruger.
"The tone of the statement is likely to be more hawkish, given recent exchange rate developments," she said.
However, Absa senior economist Peter Worthington said the overly hawkish policy expectations were contributing to the weakening currency along with falling global risk appetite and the strengthening dollar.
The rand has depreciated by about 7% since the last monetary policy committee meeting.
"Underlying economic activity remains subdued, which would tend to support either steady to lower interest rates," said Nedbank economist Johannes Khosa.
"Policy easing is unlikely in the medium term as inflation is likely to pick up in the coming months on the back of higher fuel prices and a weaker rand."
Khosa added, however, that inflation was expected to remain in the target band for the next three years.
In the context of weak economic data, analysts also expect the Bank to revise down its growth forecasts for the year from 1.7%.Business Live
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