Sarb cuts in­fla­tion fore­cast for 2018

The Star Early Edition - - COMPANIES/ANALYSIS - Annabel Bishop

SOUTH Africa is likely en­ter­ing a rate cut­ting cy­cle, with this change in di­rec­tion ini­tially im­bued by a no­table down­ward ad­just­ment to the Re­serve Bank’s (Sarb) in­fla­tion fore­casts in July to bring them be­low the con­sen­sus economists view.

Specif­i­cally, the Sarb has now dropped its 2018 fore­cast to 4.9 per­cent year-on-year (y/y), as it as­sumes lower oil prices, took into ac­count re­cent rand strength, a lower elec­tric­ity tar­iff than it pre­vi­ously ex­pected for 2017 and the ad­vent of re­ces­sion.

While this has given the Mon­e­tary Pol­icy Com­mit­tee (MPC) con­fi­dence to cut, a cut which should have ar­guably oc­curred last year al­ready as eco­nomic ac­tiv­ity flagged heav­ily, July’s poll for CPI (con­sumer price in­dex) in­fla­tion, at 5.3 per­cent y/y, is sig­nif­i­cantly higher than the Sarb in­fla­tion fore­cast for 2018.

The Sarb has com­mu­ni­cated pre­vi­ously that in­fla­tion fore­cast to­wards the up­per limit of its 3 to 6 per­cent tar­get band in a twelve to eigh­teen month pe­riod did not bring it much com­fort to cut. Pres­sure on Eskom’s fi­nances, how­ever, means a sig­nif­i­cantly higher elec­tric­ity tar­iff could oc­cur next year, with a fig­ure of 20 per­cent y/y al­ready sug­gested, but one of 8 per­cent built in by the Sarb for next year.

A 15 per­cent to 20 per­cent tar­iff in­crease in elec­tric­ity prices could bring the CPI fore­cast of the Sarb closer to 5.5 per­cent for 2018, with dou­ble dig­its elec­tric­ity price in­creases of these mag­ni­tudes hav­ing oc­curred be­fore.

While the MPC has made sig­nif­i­cant changes in its in­fla­tion fore­casts from one meet­ing to an­other be­fore and the in­ter­est rate cut is very wel­come, it is un­likely there will be much scope for cut­ting rates next year as pres­sure will be on for sig­nif­i­cant tar­iff in­creases from wa­ter as well as elec­tric­ity.

South Africa risks se­vere rand weak­ness from po­ten­tial down­grades to its Moody’s and S&P lo­cal cur­rency.

Tar­iff hike

And next year the Sarb will be ey­ing its CPI in­fla­tion fore­casts for 2019, which is cur­rently 5.2 per­cent y/y (from 5.5 per­cent y/y pre­vi­ously, while the July poll is 5.5 per­cent y/y) and the out­come will likely be higher on a sub­stan­tial elec­tric­ity tar­iff hike.

Con­se­quently, South Africa’s in­ter­est rate cut­ting cy­cle may prove short in du­ra­tion, and shal­low, given that the risks to fu­ture in­fla­tion are pos­si­bly more to the up­side than out­lined in the MPC state­ment.

But bal­ance of risks on the fu­ture aside, the rate cut will be very use­ful to over-in­debted con­sumers, with many fi­nan­cially vul­ner­a­ble.

Annabel Bishop is In­vestec Bank’s chief econ­o­mist in South Africa.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.