Picture: MARTIN RHODES
Picture: MARTIN RHODES

The Reserve Bank is expected to remain hawkish with monetary policy as the rand and higher oil prices drive inflation up.

Data from Statistics SA showed that despite the producer price index (PPI) moderating slightly, to 5% in October, it had accelerated faster than expected in September. Economists say possible interest-rate hikes from the Reserve Bank in 2018 are gaining impetus as inflation rises.

A ninth consecutive monthly trade surplus in October, however, is expected to create some stability for the rand.

Despite expectations of the first deficit for 2017, the South African Revenue Service (SARS) showed SA recorded a trade surplus of R4.56bn in October 2017.

BNP Paribas economist Jeff Schultz said a cumulative trade surplus of more than R51bn for 2017 compared to a cumulative deficit of just under R10bn in the same period in 2016 indicates that SA’s current account deficit will remain well-contained at between 2.5% and 3% of GDP over the medium term.

"Lower external account vulnerability should, therefore, remain a favourable backstop to the currency in an increasingly volatile political climate," he said.

NKC economist Elize Kruger said export growth is supported by a moderate recovery in SA’s major trading partners, as well as higher commodity prices, whereas the sluggish local economy is still keeping a lid on import growth. "Both developments favourably impact on the trade balance, the current account balance and, [consequently], also provide support for the rand exchange rate."

The inflation outlook, however, remains sticky. Kruger said while moderate food prices, low demand and excess production capacity have contained pricing pressures on production levels during the past year, a weaker rand and higher international oil prices have pushed fuel prices higher. "[This] will also push producer and consumer inflation rates up in the next few months."

Nedbank economist Johannes Khosa said: "Producer inflation is expected to remain below 6% for the remainder of the year, but to tick up marginally from current levels off a lower base." He added that the monetary policy committee (MPC) will probably tighten slightly later in 2018 as consumer inflation increases towards 6%.

October’s consumer price index (CPI), also released last week, moderated to 4.8% year on year from 5.1% in September. Despite the moderation, the Reserve Bank remained hawkish.

The Bank warned at last week’s MPC meeting that according to their quarterly projection model, there may be three interest-rate increases of 25 basis points each by the end of 2019, compared with one increase previously.

Bank governor Lesetja Kganyago, however, said, "This does not imply an unconditional commitment to this policy path."

In July, favourable inflation trends in both consumer and production inflation, coupled with the weak economy, saw the Bank cut interest rates by 25 basis points.

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