Price pressures were subsiding sharply as the economy contracted but inflationary risks remained, Andre Roux, the head of fixed income investment at Investec Asset Management, said on Thursday.
He cited cost pressures from several items in the consumer basket. Taxi fares rose 17 percent year-on-year in January and funeral costs 19 percent.
Wages increased 12 percent, new vehicles eight percent and appliances 11 percent.
Roux described the pricing of vehicles and appliances as "suicidal pricing". In other words, the products could become unaffordable.
He questioned the validity of "funny numbers" in the January data which showed that financial service fees had risen 17 percent and recreational equipment 10 percent.
But Roux said deflation risks were rising as spare capacity grew. South Africa had the potential to grow 4.5 percent a year. When growth exceeded this, inflationary pressures rose.
However, as the economy started to contract, factories were left with excess capacity.
A weakening rand, which had made imported goods more costly, was an inflationary risk. But Roux said the currency was "fundamentally undervalued" and forecast it would strengthen as risk aversion subsided.
He said this year it would range between R9.50 and R10.50 to the dollar, depending on risk aversion among global investors.
High interest rates were often seen as supportive of the rand but, in the present context, the differential between local and other rates would not make the slightest difference because emerging market currencies were being driven by "risk aversion and growth potential". In other words, lower rates, which stimulated growth, would eventually attract investment.
The current account deficit could subside from eight percent of gross domestic product, with improvement on the "services side". There could be relief on the financial account with a return of investment. This would support the rand and damp inflation. - Ethel Hazelhurst