Upbeat chatter deflated by inflation

Rain relief may be dampened by oil prices

FOR most of the festive season we heard — and manufactured — reasons for 2017 being a much better year than 2016.

Last year, we witnessed what turned out to be the most divisive US election in recent times, and we watched Britain dump the EU in what appears to be an ideological shift to a “me first” world.

We were also rudely reminded of the temporary nature of this thing we call life. Whether you loved the faithful George Michael, purple Prince, invincible Muhammad Ali or nkalakatha (top dog) Mandoza, a sense of great loss was felt by many in 2016.

All this may have contributed to the hope — not necessarily the wellconsidered assertion — that 2017 would be much better.

Almost every South African economist I encountered in late 2016 had a bagful of reasons why inflation would improve dramatically in the first half of 2017.

As better rains fell, farmers were said to be planting more hectares of maize than in recent times.

Rainfall for the remainder of the summer season was forecast to be “above normal”, and this would improve soil quality and calm recent concerns on diminishing dam levels.

Grain South Africa forecast plantings on 2.4 million hectares, which would deliver a maize surplus in 2017 and reduce food-price inflation.

This was all until the monetary policy committee meeting of the Reserve Bank this week. Perhaps US economist and author Thomas Sowell is right when he says people who enjoy meetings should not be in charge of anything. Those in charge of our monetary policy cut their meeting shorter by a day, and swiftly communicated their decision to keep the repo rate steady at 7%.

The decision on the rate itself was not much of a surprise. It was the bank’s view on inflation that caught many off guard.

The very first words out of Reserve Bank governor Lesetja Kganyago’s mouth were: “Since the previous meeting of the monetary policy committee, the near-term inflation outlook has deteriorated.

“The expected inflation profile has been negatively affected by higher international oil prices and a persistence in elevated food-price inflation despite improved rainfall in many . . . drought-stricken regions.”

The bank had expected CPI inflation to come in at 6.5% in December 2016, but the official number was 6.8%, up from 6.6% the month before. The bank admitted this had “surprised” it as food inflation turned out yet again to be the biggest culprit, coming in at 12% — matching October’s high.

So where had the optimism about

The bank’s revised CPI forecast . . . tells me that they are more worried

falling inflation come from?

Argon Asset Management’s Thabi Leoka concedes that, ultimately, everyone is forecasting, and that comes with inherent risks.

“From what I gather from . . . agricultural organisations, they are a lot more positive.

“The risk I see is oil prices. Last year, we had an increase in oil prices, and if they keep increasing, this will feed into fuel prices, and this will hike the CPI.

“There were also analysts who expected a cut in rates, because in their previous statement the Reserve Bank indicated that we could see an end of the tightening cycle, and I don’t see that happening now, especially when you look at the bank’s revised CPI forecast.

“It tells me that they are more worried and it is unlikely that they will touch rates.”

The Reserve Bank annihilated all hope of lower inflation in early 2017 by declaring that “headline inflation is now expected to only return to within the target range [of 3% to 6%] during the final quarter of 2017”.

This means the repo rate is likely to stay at 7% for all of 2017.

Unless, of course, inflation surprises everyone again.