Sarb could forecast lower growth

Currency weakness amid emerging market turmoil and disappointing domestic growth outcomes are set to feature prominently in this week’s Monetary Policy Committee (MPC) at the SA Reserve Bank (Sarb).

The meeting will determine a suitable interest rate policy that will keep inflation inside the target range of 3-6% annually, ideally anchored towards the middle of the target range.

At the last two MPC meetings, Sarb raised its inflation expectations. Governor Lesetja Kganyago noted in July that headline CPI inflation was expected to edge closer towards the upper end of the target range to 5.6% and 5.4% in 2019 and 2020, respectively.

In July, Sarb expected headline inflation to peak around 5.7% in 2019’s first and second quarters.

Since the July meeting, renewed rand weakness materialised as emerging market pressures mounted, with the rand losing around R2 in value against the US dollar. New data also revealed that the SA economy entered its first technical recession since the 2008/09 financial crisis.

Further, rising oil prices continued to spur local fuel prices, adding to consumer woes. The price per barrel of Brent oil climbed 25% since July.

In combination, these developments explain the increase in petrol prices of over 17% since September 2017.

The department of energy decided to absorb part of September’s petrol price hike in a once-off effort to provide consumers some reprieve. Nonetheless, future petrol price hikes remain on the horizons. CEF anticipates petrol price increases of as much as R1.14/litre in October.

Sarb will likely also indicate a slight upward adjustment in inflation expectations, as well as a downward revision of economic growth for 2018.

To achieve Sarb’s July expectation of economic growth of 1.2% in 2018, SA’s economy would have to expand by an unrealistic 1.8% on average in the second half. In light of recent economic data, including sharp contractions in business and consumer confidence, the bank is likely to make a notable downward revision to economic growth.

Sarb is unlikely to hike interest rates in this month’s meeting, albeit warning of a possible hike in November. It’s likely that the bank will focus on longer-term developments. Maura Feddersen is an economist at PwC

Picture: Moneyweb All bar one of the economists polled by Reuters predicted that Sarb would leave its main lending rate at 6.5% this week, as it weighs economic weakness against a pickup in inflation.