RATES CUT UNLIKELY
Fuel price and weaker rand to nix inflation reprieve
A weaker rand and rising fuel prices will ensure that any relief from the surprise slowdown in inflation in May will be short-lived.
The April VAT increase will also push inflation higher in coming months, making it unlikely the Reserve Bank will be able to cut interest rates further in 2018. Deputy governor Kuben Naidoo this week suggested as much, warning that the Bank may have to raise rates if the rand’s 10% drop in 2018 leads to a generalised increase in prices.
The Bank was likely to keep rates on hold "over the short to medium term, while trying to gauge the effect of global developments such as higher US rates, an escalation in the global trade war and increased nervousness about the economic fundamentals in many emerging economies", said Stanlib chief economist Kevin Lings.
The inflation rate was comfortably within the Bank’s 3%-6% range in May, dropping to 4.4%, from 4.5% in April, according to Statistics SA data released on Wednesday. It would probably drift towards the top end of the target in the first half of 2019, Lings said.
The monetary policy committee left the repo rate unchanged at 6.5% in May, with higher oil prices and wage increases cited as reasons to be cautious. Its next decision is due on July 19.
In contrast to the March meeting, when the committee cut rates and said the rand was overvalued, policy makers have turned hawkish in recent months as emerging market jitters and growing concern of a global trade war pushed the local currency weaker.
The rand had gained just more than 1% on the dollar to R13.60 by 7.15pm on Wednesday, after sliding the previous day to its weakest level in more than six months.
It got a reprieve as global markets recovered from three days of sharp sell-offs, sparked by concern over Donald Trump’s trade war with China.
The Bank was unlikely to increase rates soon, with the economy weak and inflation still relatively muted, economists said. GDP shrank more than 2% in the first quarter and SA is struggling with an unemployment rate that is close to 30%.
"This relatively benign inflation outlook and the still weak economy will probably convince the monetary policy committee to delay hiking rates for as long as possible," said Busisiwe Radebe, an economist at Nedbank, who expects inflation to stay within target over the next three years.
Expectations of higher rates might prove premature, NKC economist Elize Kruger said. Higher inflation would erode consumers’ spending power, partially offsetting the optimism that took hold earlier in the year.