An improving inflation outlook should result in a 50 basis points cut in the South African repo rate later this week according to London-based economist Razia Khan from emerging market specialist bank, Standard Chartered Bank.
“While demand in South Africa is undeniably strong, there is little conclusive evidence that the strength of demand will have inflationary consequences.
“Interestingly, other inflation threats are also seen as receding. For example, recent official comments downplayed the impact of unit labour costs as a potential inflation risk.
“But perhaps the most compelling argument in favour of a rate cut is the combination of a correction in oil prices and continued rand strength. In early December, there was almost a 40c/litre over-recovery in South African petrol prices, signaling the potential for significant declines in domestic retail pump prices in the future,” Khan said.
She expects the strong rand alone to push CPIX, which is consumer inflation excluding the effect of mortgage rate changes, towards the lower end of the central bank’s targeted 3% to 6% band, justifying another interest rate easing.
“On the basis of the stronger currency, we expect that revised inflation forecasts from the South African Reserve Bank [already signaling little chance of an overshoot of the target], will fall even further.
“This is despite the expectation of further fiscal stimulus, and good news on growth. A rate cut should not however be interpreted as an attempt to weaken the rand. After all, 600 basis points of easing in the current interest rate cycle have left the rand even stronger against the US dollar than it was when the easing cycle began in June 2003. To some extent, the tightening effect of currency strength has compensated for the easing of monetary policy,” Khan said.
A two-day meeting of the South African Reserve Bank’s Monetary Policy Committee gets under way in Pretoria on December 8, but the consensus is for no change in rates due to strong domestic growth and there is therefore no compelling reason for the central bank to cut rates. – I-Net Bridge