Eyes glued on Bank’s first MPC gathering

Inflation will be the common thread running through the coming week, with events likely to be dominated by the Reserve Bank’s first monetary policy committee (MPC) meeting of 2017 on Tuesday.

The consensus is for the repo rate to be held steady at 7% but for Bank governor Lesetja Kganyago to deliver a moderately hawkish statement in which he emphasises the risks to the inflation outlook.

The fact that food price inflation is falling slower than expected, despite the good summer rains, will be among the factors keeping the Bank cautious. Others include the political uncertainties in the global economy, the sustainability of capital flows into emerging markets, and inflation expectations, said BNP Paribas Securities economist Jeffrey Schultz.

The committee will have had sight of the Bureau for Economic Research’s inflation expectations survey for the fourth quarter of 2016, which will be released in conjunction with its statement.

At 6% and 5.9% for 2017 and 2018 respectively, the Bank considers average inflation expectations too close to the upper end of the 3%-6% target band. These are unlikely to change much.

“The MPC is likely to remain firm in its view that inflation expectations need to slow meaningfully below its upper 6% target limit before it can even consider easing rates,” said Schultz. “Inflation would also need to move closer to the midpoint [4.5%] in order to prompt a shift in view.”

The Bank expects CPI (consumer price index) inflation to slow from 6.4% to average 5.8% because of steep statistical base effects as food inflation slows and the effects of the drought wash out.

But this is unlikely to be significant enough to spur rate cuts. The 21 economists surveyed by Reuters expect the repo rate to remain at 7% throughout 2017, with the first cut coming only in the first quarter of 2018.

Producer price inflation (PPI) figures for December are due out on Thursday.

Agbiz agricultural economist Wandile Sihlobo expected PPI to have moderated to 6.5% year on year in December from 6.9% because of a rain-related improvement in crop output and prices.

On Wednesday, Statistics SA is set to release details of a routine rebasing and reweighting of the CPI.

The changes will take effect in the January 2017 CPI print which is due on February 15.

Deutsche Bank economist Danelee Masia noted that previous CPI revisions had resulted in a 0.1%-0.3% downward revision to annual inflation forecasts. This occurs since the rebasing alone will “reset” the upward biases from components such as food, water and electricity that have risen faster than headline CPI.