Better-than-expected credit extension and factory-gate inflation data this morning point to a cut in interest rates despite consumer inflation remaining sticky.
The bond market might not like the still-high consumer inflation reading, but it does concede that at least a lower level was reported after the surprise increase in February, and this raises the possibility that a peak has been reached.
“Although lower than the previous reading of 8,6% [at 8,5%], and indicating that inflation has possibly peaked, certain components continue to keep this number higher than expected.
“Prices of alcoholic beverages and tobacco products were the main culprits after the hike in sin taxes in the February budget. Food price inflation, however, moderated to 14,7% y/y in March from a February reading of 15,8% y/y,” note RMB’s fixed income experts.
They say that in light of the slightly higher CPI (consumer price index) inflation number — the market was expecting a decrease to 8,4% — local bonds gave back the previous day’s gains and more with R157s ending the session eight basis points weaker at 7,93%.
“While the latest inflation number does not influence our economic team’s view on the medium-term trajectory of inflation, their forecasts have been revised slightly higher. CPI inflation is expected to average 7,2% for 2009, [versus 7% previously], and 5,1% in 2010 [versus 5% previously], with CPI expected to continue to ease gradually this year, returning to the target range in the first quarter of 2010,” they say.
Comments from the central bank this afternoon on inflation will thus be carefully monitored by the markets. Last time — on March 24 — they said they expected CPI to decline to below 6% in the third quarter of 2009 and to average 8,1% in the first quarter of 2009.
The bond analysts say that of continued concern are the latest rumblings on the next round of wage negotiations received by the Chamber of Mines and from Solidarity negotiating on behalf of Telkom workers.
“Solidarity is demanding an above-inflation 16% increase in pay, and don’t forget the latest bus driver strike.”
Still, taking into account these potentially inflationary drivers, the Monetary Policy Committee is expected to cut by 100 basis points today with 50 basis point cuts envisaged for May and June.
“Bear in mind though that the significant rand strength of late and the deflationary effects of the widening output gap on an anticipated technical recession still pose downside risks to the current interest rate easing cycle,” say the analysts.
Chief economist from Nedbank, Dr Dennis Dykes, told I-Net Bridge on Thursday that when it comes to inflation, the central bank would need to take a 12-month view and so the disappointing number should not affect the cutting cycle at this juncture.
“One or two disappointments in terms of inflation in the short term shouldn’t affect things,” he said.
But Dykes prefers putting the lower credit extension data — reported this morning — into perspective, saying that while it is good for rates, it also suggests the local economy is slowing “pretty rapidly”.
“Credit numbers are a very good indicator of what is happening in the underlying economy,” says Dykes.
Data this morning showed that credit extension to the private sector (PSCE) grew at a rate of 8,5% y/y in March from 11,05% in February and better than expectations of 9,2% y/y.
Perhaps just as telling was that PPI data showed an increase of just 5,3% y/y from 7,3% in February and expectations of 5,5%. Chris Hart, chief economist at Investment Solutions, says this does show that risks around inflation are receding.
“The inflation picture that is emerging is a lot better than what the CPI number yesterday suggests,” he says. — I-Net Bridge