Inflation rate dips more than expected to 6.1%

SOUTH Africa’s inflation rate dipped more than expected to 6.1 percent year-on-year in March from 6.3 percent in February, but analysts quickly warned that while it was expected to return to the SA Reserve Bank’s (Sarb’s) target range of 3 to 6 percent, it would not automatically trigger interest rates cuts in the foreseeable future.

Statistics South Africa (StatsSA) yesterday said core inflation, which excludes food, non-alcoholic beverages, energy and gasoline slowed to 4.9 percent from 5.2 percent in February – the slowest rate since 2013.

Food inflation, which climbed close to 12 percent last year as the worst drought in decades swept through southern Africa, was again on the retreat as it calmed down to 8.7 percent year-on-year in March, the weakest rate in more than a year.

Momentum Investments and Savings economist Sanisha Packirisamy said while the inflation was expected to reach close to 5 percent on average in 2018, the country was still vulnerable to investor sentiment, given its reliance on foreign capital flows to fund the deficit on the current account.

“The recent downgrades to junk status by S&P and Fitch ratings agencies and ongoing political noise have raised the risk of higher inflation and lower growth.

“As such, Momentum Investments expects the Sarb to maintain interest rates at the current 7 percent level in upcoming quarters,” said Packirisamy.

Support In March, Sarb said it expected the inflation to average 5.9 percent in 2017.

Sarb said the inflation cycle had reached the end of its tightening phase, and that any rate cuts would depend on the available data.

Africa Economist at Capital Economics John Ashbourne said the Reserve Bank would probably welcome the opportunity to provide some support to the economy.

“Today’s data supports our non-consensus view that the Reserve Bank will cut interest rates from 7 percent to 6.50 percent by the end of this year… we expect that the weakening of food price inflation caused by an improved harvest will have a bigger effect.

“Headline inflation

The inflation numbers were a third set of positive data in a space of two months.

probably re-enter the South African Reserve Bank’s 3 to 6 percent target rate in the second quarter,” said Ashbourne.

The inflation numbers were a third set of positive data to emerge in a space of two months that pointed to a resurgent South African economy.

Last month the central bank said the country’s current account deficit had narrowed to its best levels in six years in the last quarter of last year.

The bank said an increase in mining exports and dividends flowing into the country had contributed to narrowing the current account deficit to 1.7 percent of the gross domestic product.

Data from Stats SA also showed that mining output jumped 4.6 percent year-onyear in February while the production of platinum group metals compensated for a steep fall in gold output after it rose by 47 percent year-on- year.

A senior economist at Old Mutual Investments, Johann Els, said there was still room for one 25 basis points cut late in the year.

“Inflation will still fall to 5 percent – or maybe even below 5 percent – by June. But the big drop will likely already happen with the next number – for April 2017 when CPI inflation is expected to fall to 5.4 percent,” Els said.

However FNB senior industry economist Jason Muscat said inflation remained uncomfortably high to put any brakes on interest rates.