from the editor
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.