from the edi­tor

Finweek English Edition - - CON­TENTS - JANA MARAIS

per­haps it is just the sense of a new be­gin­ning that a new year brings, but there seems to be a feel­ing of op­ti­mism in the air. Good rains have fallen over large parts of South Africa; the rand is al­most 20% stronger against the dol­lar com­pared with this time last year; and it’s been rel­a­tively quiet so far on the Zupta front.

The peace and quiet won’t last, of course, and the first bit of con­cern­ing eco­nomic news – con­sumer in­fla­tion num­bers for De­cem­ber – has al­ready damp­ened my spir­its. Head­line in­fla­tion rose 6.8% year-on-year (y/y) in De­cem­ber, quite a bit above mar­ket ex­pec­ta­tions of 6.5%. The most con­cern­ing, tak­ing into ac­count that more than 60% of South African house­holds earn less than R7 200 a month, is food in­fla­tion, which rose by 12% y/y. Fruit prices were up 19.2% y/y, grain was up 17.4%, veg­eta­bles in­creased by 8.1%, and meat prices rose by 7.6%. We are all a bit poorer than we were in De­cem­ber 2015.

The good news is that the in­crease in sum­mer rain­fall should lead to “mean­ing­ful mod­er­a­tion in food in­fla­tion” this year, which should help to bring over­all in­fla­tion back within the Re­serve Bank’s tar­get range of 3% to 6%, FNB said. The bank is fore­cast­ing an av­er­age in­fla­tion rate of 5.2% in 2017, com­pared with last year’s 6.3%.

This should give some room for the Re­serve Bank to start cut­ting in­ter­est rates, which have in­creased by 200 ba­sis points since 2015. How­ever, the Bank would have to keep a num­ber of other risks in mind that are mak­ing any rate cuts this year un­likely. FNB said risks stem­ming from global events “could desta­bilise the rand in the months ahead, and could de­ter the ex­pected im­prove­ment of the in­fla­tion rate”. (See page 12 for a de­tailed ar­ti­cle on the out­look of the rand.)

In ad­di­tion, Stan­lib warns that SA’s growth out­look re­mains “trou­bling and at risk of re­main­ing weak, while the mar­kets re­main anx­ious about the po­lit­i­cal en­vi­ron­ment”. While the Re­serve Bank should have some scope to cut rates in late 2017, this will be “sig­nif­i­cantly im­pacted by any fur­ther up­ward ad­just­ments to US in­ter­est rates”, Stan­lib said. The US Fed­eral Re­serve is ex­pected to hike rates two or three times over the course of 2017. The risk of a down­grade to SA’s sov­er­eign credit rat­ing also re­mains.

Wise then to keep a tight grip on those purse strings.

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