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SA could get rate cut in November

Bank of America Merrill Lynch is forecasting another 50 basis points rate cut for South Africa in November and believes the country’s first rate hike since 2008 is only likely to occur in the first quarter of 2014.

The bank also forecasts that inflation is likely to remain within the SARB’s 3%-6% target range over the coming year.

Central bank govenor Gill Marcus. Photo: Mxolisi Madela. Credit: Independent Newspapers

“In the very near term‚ we expect a little more inflation pressure in Q3 2012 than we had previously but this is still likely to dissipate in Q4. In H1 2013‚ we also expect stronger inflation relative to our previous forecasts but expect this to ease nicely late into the year‚” the bank said in a report.

“All things considered‚ we expect headline CPI to back up to 5.4% by September on higher petrol prices.”

Thereafter‚ despite food price inflation picking up from 5.4% in July to 9.7% in December‚ weaker goods (ex energy) inflation into year-end from a sharp slowdown in economic growth to below 2% annualized in both Q3 and Q4‚ will likely combine to take headline inflation back down to 5.2% by year-end.

If is also worth noting that the rally in USDZAR over the past week to the 8.20 level may also lead to some petrol price relief from October‚ assuming the Rand holds these levels in coming days and weeks.

“From the perspective of the SARB‚ the combination of the weaker activity data we expect in coming months together with a probable moderation in inflation from October will likely provide the backdrop for a 50bp cut in November‚ in our view‚” the bank added.

It believes the late 2012 trend toward lower inflation will reverse into 2013‚ adding that it has revised its inflation forecasts higher for H1 2013.

“In the main this represents ongoing pass-through into food price inflation which will likely accelerate to 14% yoy in H1 2013‚ on average‚ as categories such as meat and diary respond to higher maize prices with a lag of about 9 months in our inflation model. While this upward effect is tempered by a further moderation in goods (ex energy) inflation‚ headline nevertheless moves higher to 5.6% by mid-year‚ with a chance of a temporary peak around the 6% mark moving into Q3. Evidence of higher inflation will likely put a break on any further easing by the SARB‚ in our view‚ and is the principal reason we forecast only one further rate cut to come (to 4.5%) in November this year‚” the bank stated.

Pressure from food prices is likely to dissipate in H2 2013‚ in the bank’s view‚ allowing for headline inflation to moderate‚ assuming our assumptions that oil prices fall back below $100bbl and USDZAR tracks around an 8.00 level prove correct.

“We see headline inflation moderating back to 5.2% by end-2013‚ which will likely occur against the backdrop of improving economic growth. Taken together‚ we believe this will allow the SARB to remain on the sidelines. We therefore expect the repo rate will be left at the level of 4.50% into early 2014.”

The bank said its new inflation forecasts support the notion that the SARB will operate in three distinct Acts. Into late 2012‚ inflation already below 6% will likely moderate back toward 5% amid weakening activity data. This combination will reinforce the SARB’s dovish‚ growth-orientated outlook and is likely to lead to a 50bp cut in November. Act Two‚ of rising inflation in H1 2013‚ will probably see the SARB on the sidelines‚ notwithstanding potentially soft economic growth. In Act Three‚ even through economic growth is likely to pick up in H2 2013‚ moderating inflation implies no need for the SARB to rush to hike rates.

“We therefore see rates on hold at 4.50% throughout 2013 and see the earliest possible hike in Q1 2014.” - I-Net Bridge

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