The economic news was good on Tuesday – the rand broke through the R12 to the dollar level and consumer inflation, while slightly higher, was within the target range for the South African Reserve Bank.
“Positive comments from SA officials in Davos about ending corruption, repairing state enterprise governance and the health of public finances, maintaining key institutional strengths and promoting economic growth have also assisted in the lift in the domestic currency,” says Investec group economist Annabel Bishop.
The rand broke through the R12 level just ahead of a release by Statistics SA showing that headline consumer inflation rose to 4,7% in December from 4,6% in November. This is still within the Reserve Bank’s consumer inflation target range. The upward tick stems mainly from the transport sector where petrol prices increased by 14,2% last year.
In 2017 consumer prices increased by an average of 5,3%, down from 6,4% the previous year.
In November and December, consumer prices increased by 0,5%, largely driven by increases in prices for transport, food, non-alcoholic beverages, housing and utilities.
“Inflation is expected to remain below 5% in the first few months of 2018, before quickening once more to above 5% in the latter part of the year as [the] benefit [of] lower food prices recedes, the oil price rises from current levels and the rand gives up some of the significant gains made in the early part of the year,” says Nedbank.
Although the Reserve Bank could cut rates at its next monetary policy committee meeting in March, Nedbank warns that a possible downgrade to sub-investment grade by credit rating agency Moody’s and disappointment in the policy environment could weigh on the rand and push inflation.
Bishop also warns that the much anticipated credit rating announcement could see the rand weaken again. ”Should South Africa lose its last key investment grade rating and drop further down the sub-investment grade rating ladder, then the rand could see substantial weakness, moving back towards R13.50/USD, and higher.”