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.”
BUSINESS REPORT
ONLINE