Hopes rise for a cut in in­ter­est rates

The Star Late Edition - - BUSINESS REPORT - Wise­man Khuzwayo

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.

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