Inflation data give Kganyago good start

Interest rates seen on hold

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.