Lesetja Kganyago. Picture: FREDDY MAVUNDA
Lesetja Kganyago. Picture: FREDDY MAVUNDA

The committee met in November, not long after the shock electoral victory of US President Donald Trump. And its statement zeroed straight in on that, opening with, "Since the previous meeting of the MPC, the global economic and political landscape has changed significantly following the US presidential election," and going on to highlight the high degree of uncertainty about the new administration’s policies and the volatile environment this created.

When the committee met this week, the first thing its statement said was: "Since the previous meeting of the MPC, the near-term inflation outlook has deteriorated, but the longer-term outlook is more or less unchanged."

This time, higher international oil prices were a big issue, as was the fact that food price inflation is proving sticky despite better rains. The rand is still a wild card — it has appreciated, but as the committee sees it, the key risks could re-emerge at any stage. And the Trump risk is still high on the list.

That set the stage for the committee to adopt a rather more hawkish tone than many had perhaps expected. Many in the market were expecting that interest rate cuts might be on the cards from later in 2017. Reserve Bank governor Lesetja Kganyago and his team seem to be suggesting those market players should not be holding their collective breath in anticipation of a cut any time soon.

That is mainly because the risks to inflation are, as they say, to the upside. However, it’s not just the risk. Inflation is now expected to remain in breach of the inflation target for most of the year, coming down below 6% later than was expected last time round. The average for 2017 is now forecast at 6.2%.

A hike was not discussed. Everyone on the committee voted to keep rates on hold

That compares with November’s 5.8% forecast, so it is a jump matched only by the 0.6 percentage points by which the Bank lifted its forecast in January three years ago.

So sizeable a deterioration in the inflation outlook would normally have the committee thinking about hiking interest rates. This time, a hike was not discussed. Everyone on the committee voted to keep rates on hold, as expected.

The difference between three years ago and now is that then the Bank’s forecast for core inflation jumped, too, while this time it didn’t. Core is a measure that strips out volatile, externally influenced fuel and food price inflation. The committee uses it to try to assess the underlying inflationary pressure in the economy.

The conclusion, for now, is that though the international oil price and domestic fuel prices are climbing faster than expected, and though food price inflation is subsiding slower than expected, these are both driven by one-off supply side factors, such as drought and global oil geopolitics. Crucially, there’s no evidence, yet, that inflation is running away in response. Which is why, although 2017’s inflation forecast is up, 2018’s is unchanged, as is core.

But the committee is on guard, it made very clear this week. Any sign that price pressure is spreading across the economy — or that those risks to the rand materialise — and the committee would consider hiking again. It’s certainly not about to start cutting; Kganyago made that very clear.

Whether this week’s stern stance was more hawkish than before is a question. Rand Merchant Bank’s Carmen Nel makes the point that the inflation forecast is now bearish enough that it should prevent upside inflation surprises and so the pressure to hike again. But where previously the consensus was for cuts later in 2017, this week’s statement will inject more two-way debate, Nel says.

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