Hopes rise for a cut in interest rates
THE ANNUAL headline consumer price index inflation slowed down as expected in January as the rand continues to make a breakthrough against the dollar, leading to hopes that a cut in interest rates may be on the cards.
Retail sales rose 0.9 percent year-on-year in December, lagging market expectations, following a revised rise of 3.1 percent in November, data from Statistics SA showed.
Annual inflation slowed to 6.6 percent in January from 6.8 percent in December, below market expectation of 6.7 percent. Nedbank said that if the rand holds, and barring any excitement from other domestic and external shocks, its baseline view was that interest rates had probably peaked, with the next move by the Reserve Bank likely to be down.
“We still expect the MPC (monetary policy committee) to remain cautious though, leaving rates at current levels for some time, given the downside risks posed to the rand by a volatile domestic landscape and changing global dynamics.
“We expect the MPC to start easing monetary policy in the second half of the year as inflation moves into the target band on a more sustainable basis. However, a number of outcomes for the year ahead are still possible.”
Old Mutual chief executive Rian le Roux said a number of fundamental issues were behind the rally in the rand. He said among them was a solid rise in recent months in the prices of a number of key commodity exports, such as iron ore. “In fact, looking back over 2016 shows that the price of a basket of South Africa’s four largest commodity prices rose by about 30 percent in US dollar terms from late in 2015 to the end of January 2017.”
Le Roux said another reason could be a perception the economy had finally turned the corner. “While GDP (gross domestic product) likely contracted again in the fourth quarter of last year, a number of high-frequency indicators have started to send more positive signals about the economy. These include several months of rises in the leading-indicators index, surveys of manufacturing conditions and vehicle sales.”
Elize Kruger, an analyst at NKC African Economist, said food price pressures continued to be of concern, with notable monthly increases. “Although the January release largely confirms our expectations about the headline consumer inflation cycle in 2017, the higher than expected outcome of food prices remains a concern.
“On the one hand, meat prices have only started rising in recent months as farmers started rebuilding their cattle stock levels after the drought, while the expected moderation in the other food items is disappointingly slow.”
She said that furthermore, the outbreak of crop-eating army worms, which had already been spotted in six of South Africa’s nine provinces, could lead to significantly reduced crops and subsequently to less food price moderation than expected.