Inflation surprises analysts by slowing in April

Inflation slowed to 4.4% in April, below expectations, strengthening the case for the Reserve Bank to maintain  interest rates.

Measured by the annual change in the consumer price index (CPI), inflation decelerated from March’s 4.5%. This was below a poll by Trading Economics, which expected inflation to rise to 4.7%; and the Bloomberg consensus, which expected inflation to remain flat at 4.5%.

This is despite the steepest fuel price hike in four years in April — a third consecutive hike that was countered by muted underlying inflation. In March, another fuel price hike saw inflation rise to the mid-point of the Bank’s 3%-6% target range.

While the transport component increased from 0.9 of a percentage point in March to 1.1 percentage points in April, this was offset by a decrease in alcoholic beverages and tobacco, which dropped from 0.4 of a percentage point to 0.3 of a percentage point; while recreation and culture fell from 0.1 of a percentage point to zero.

However, compared to a month ago, inflation rose by 0.6% as transport contributed 0.4 of a percentage point.

This comes a day ahead of the Bank’s monetary policy committee (MPC) meeting, at which it will announce the repo rate. The annual change in CPI is the key measure used by the MPC to set interest rates. However, slower inflation and a weak economy won’t be enough to convince the MPC to cut rates on Thursday.

“CPI inflation is projected to average 4.8% year-on-year this year, but is set to rise back towards the upper end of the target range in 2020 on low base factors and high administered price increases, especially electricity,” Investec economist Kamilla Kaplan said.

“As such, the repo rate is likely to remain on hold at 6.75% at this week’s MPC meeting to account for the higher projected inflation over the forecast horizon,” she said.

While the Bank will likely hold off on making a move this week, analysts are at odds over whether the next move will be a rate cut or a hike.

Capital Economics and Stanlib argue that there is room for the Bank to cut rates. “With weak growth and inflation fixed below the 4.5% target mid-point, we expect the key policy rate will be cut from 6.75% to 6.50% in the last quarter of 2019,” Capital Economics economist John Ashbourne said.

The Bank could look to cut rates as soon as it is comfortable that the impending upward drift in inflation is not becoming entrenched, Stanlib chief economist Kevin Lings said.

However, Nedbank expects the Bank to resume a mild hiking cycle next year March as inflation increases on the back of rising fuel prices and a vulnerable rand, which has come under pressure with the US-China trade conflict.

Nedbank economist Johannes Khosa said, “Inflation is still forecast to move gradually higher in the months ahead, due to the volatile rand and higher administered prices.” 

menons@businesslive.co.za