File picture: Philimon Bulawayo

Johannesburg – Although inflation moderated to 6.1 percent in March, down from 6.3 percent the previous month, it’s unlikely that interest rates will come down.

Paul Sirani, chief market analyst at Xtrade, explains the figures released by Statistics South Africa on Wednesday are heading in the right direction. However, policy makers are likely to sit on their hands and seek further reassurance from next month’s figures, he says.

The Reserve Bank targets inflation of between 3 and 6 percent and has held the prime lending rate at 10.25 percent for the past several meetings. Inflation was 6.6 percent in January, down from 6.8 percent in December.’

“A poor stretch for the rand during the early part of March, fuelled by the [removal] of Gordhan, will have heightened import costs and that’s likely to feed into next month’s [inflation] reading,” Sirani notes.

Jason Muscat, FNB Senior Industry Economist, notes inflation gained 0.6 percent month-on-month, although the rate continues to slow year-on-year.

He explains the biggest contributor to the headline inflation number was again food and non-alcoholic beverages, although this has eased was largely responsible for the slightly softer print.

The cessation of the drought, combined with a stronger currency relative to the same time last year saw food inflation drop from 10 percent year-on-year in February to 8.7 percent in March, Muscat notes.

Muscat notes transport was up 7.7 percent year-on-year and the additional fuel levy of 39c, which came into effect in April, should see an acceleration in this number in the coming months.

“Overall, the inflation profile remains uncomfortably high and expectations of a faster pace of easing may have to be deferred slightly given recent rand volatility in the wake of the cabinet reshuffle and ratings downgrade. There seems little doubt now that what could have been interest rate cuts later this year are unlikely to materialise this year, and we now expect rates to remain flat throughout our forecast horizon.”

Analysts have previously expressed concern that recent political moves, which saw President Jacob Zuma fire former finance minister Pravin Gordhan ina Cabinet shuffle and replace him with Malusi Gigaba, would hurt the rand, leading to higher inflation and potential interest rate hikes.

Read also: Inflation continues to moderate

The currency lost 10 percent against the dollar after Gordhan was recalled on March 27, shortly before being axed. It has, however, recovered off those lows. After the reshuffle, SA was downgraded to junk status by S&P and Fitch, both of which cited political uncertainty as the rationale behind the downgrade in credit ratings.

Sanisha Packirisamy, an economist with MMI Investments and Savings, says inflation has come in below expectations. However, he notes, bar a temporary dip below 6 percent in August 2016, headline inflation has exceeded the Reserve Bank’s official target range since January 2016.

Packirisamy notes, although inflation should continue to ease and the rand continues to trade as the third best performing currency on a one-year rolling basis, when compared to a basket of emerging market currencies, there is a risk on the upside to the rand.

In addition, says Packirisamy, even though Momentum Investments projects inflation to reach close to 5 percent on average in 2018, there is limited scope for rate cuts as emerging market currencies may come under further pressure.

“The recent downgrades to junk status by S&P and Fitch ratings agencies and ongoing political noise have raised the risk of higher inflation and lower growth. As such, Momentum Investments expects the SARB to maintain interest rates at the current 7 percent level in upcoming quarters.”