In­fla­tion data give Kganyago good start

In­ter­est rates seen on hold

The Star Early Edition - - BUSINESS REPORT - Wise­man Khuzwayo

RE­SERVE Bank gov­er­nor Le­setja Kganyago, due to pro­nounce the out­come of his first mon­e­tary pol­icy meet­ing (MPC) later to­day, could not have asked for a bet­ter way to kick off his ten­ure.

An­nual con­sumer price in­fla­tion was at 5.9 per­cent last month, the same level as in Septem­ber, and within the con­sen­sus forecasts.

This is likely to in­flu­ence the Re­serve Bank not to hike the rates when it makes its an­nounce­ment this af­ter­noon, fol­low­ing its three-day MPC meet­ing, chaired for the first time by Kganyago.

The 5.9 per­cent falls within the bank’s in­fla­tion tar­get band of 3 per­cent to 6 per­cent.

On a monthly ba­sis, prices rose by 0.2 per­cent as a re­sult of a 0.1 per­cent­age point con­tri­bu­tion from al­co­holic bev­er­ages and to­bacco.

Core in­fla­tion marginally rose to an an­nual 5.7 per­cent in Oc­to­ber from 5.6 per­cent in Septem­ber.

Annabel Bishop, the chief economist at In­vestec, said: “The new SARB [Re­serve Bank] gov­er­nor is per­ceived to be hawk­ish and could view the mar­ginal uptick in core CPI [con­sumer price in­dex] in­fla­tion neg­a­tively.

“How­ever, core in­fla­tion is in­flu­enced by ad­min­is­tered prices, ex­clud­ing en­ergy and petrol, and so is not a true read­ing of the un­der­ly­ing de­mand-led price pres­sures in the South Africa econ­omy.”

She said do­mes­tic de­mand had been con­strained by low con­fi­dence and de­clin­ing real dis­pos­able in­come growth and this would only grad­u­ally im­prove over the 2015/18 pe­riod.

Ned­bank said in­fla­tion was likely to re­main rel­a­tively con­tained in the com­ing months be­cause of lower com­mod­ity prices, es­pe­cially food and oil prices. “The volatile rand though does pose an in­fla­tion risk and we might start see­ing the ef­fects of the rand com­ing through in the num­bers fur­ther on in 2015.”

The rand re­treated slightly against the dol­lar yes­ter­day, trad­ing at R11.0668 at 5pm from a low of R11.0710 at 6.58am.

Traders said min­utes of the Fed­eral Open Mar­ket Com­mit­tee later yes­ter­day were more likely to give pol­icy di­rec­tion.

Stan­dard Bank trader In­shaan Omar said: “This will be keenly watched for clues of when the US will com­mence with its hik­ing cy­cle.”

Bishop said: “We ex­pect one fur­ther in­ter­est rate hike of 25 ba­sis points in March 2015, and then a 50 ba­sis point hike in the sec­ond half of 2015 as the global mon­e­tary pol­icy cy­cle nor­malises and South Africa fol­lows suit.”

Nazmeera Moola, an economist and strate­gist at In­vestec As­set Man­age­ment, said in­ter­est­ingly, go­ing into the last MPC meet­ing of the year, the cur­rent rand/dol­lar ex­change rate was very sim­i­lar to the rate at the time of the first MPC meet­ing of the year, when the rand traded at R11.10 to the green­back.

“How­ever, the in­fla­tion out­look has changed dra­mat­i­cally since Jan­uary, when the SARB hiked in­ter­est rates for the first time dur­ing this cy­cle.”

Moola said the big­gest fac­tor in this re­gard had been the drop of $30 per bar­rel in the oil price in the last three months. If the price stays at th­ese lev­els, or even it should in­crease to $90 per bar­rel, it will be sig­nif­i­cantly pos­i­tive for in­fla­tion.

“The ef­fect of the fall in food com­mod­ity prices over the past year should also not be un­der­es­ti­mated. While con­sumer food prices have in­creased, the lower com­mod­ity prices should see food in­fla­tion come down in the com­ing months.”

Rian le Roux, an economist at Old Mu­tual In­vest­ment Group, said the like­li­hood of a rate hike at the MPC’s meet­ing to­day was now less than 50 per­cent, with a survey of six out of 23 econ­o­mists sur­veyed be­liev­ing there would be no change.

While con­sumer food prices have in­creased, the lower com­mod­ity prices should see food in­fla­tion come down…

“This shift has been in­flu­enced by a num­ber of fac­tors, in­clud­ing weak data, the re­cent medium-term bud­get pol­icy state­ment, the fall in in­fla­tion and oil price slump, good trade num­bers for Septem­ber, and a likely down­ward re­vi­sion of the SARB’s in­fla­tion pro­jec­tions for 2015, which are cur­rently at 5.7 per­cent.”

He said given the limited risk to the econ­omy that a 25 ba­sis points in­crease would pose, based on car re­tail sales in­di­cat­ing de­mand was not slump­ing, in­creas­ing the rate would also ce­ment the Re­serve Bank’s cred­i­bil­ity, fol­low­ing its end­less re­cent warn­ings that rates needed to rise fur­ther.

Le Roux said in ad­di­tion, the cur­rent ac­count was in need of a cor­rec­tion, as fis­cal tight­en­ing was only re­ally a prom­ise at the mo­ment.

Arthur Kamp, an economist at San­lam In­vest­ments, said feed-through ef­fects from cur­rency weak­ness had been mod­est com­pared to pre­vi­ous episodes of rand weak­ness.

In any event, on a trade weighted ba­sis, the rand has been rel­a­tively sta­ble since Jan­uary.

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