Inflation remaining well within the target band, caused the Reserve Bank announcement to introduce a rate cut as debated over the past number of weeks.
Petrol price cuts
There might also be a spin-off petrol price cut of 50c/l in July, given a fall in oil prices to $45 per barrel as well as a stable rand. “This supports the case for the July inflation number we are forecasting of around 4.6%,” says Elmar Pittendrigh from Bond Gallery. Inflation is expected to remain between 4.5% and 5% for the remainder of the year.
For the past five months inflation has averaged at 5.9%, said Bond Gallery Director Kevin Mountjoy. It is expected to average at 5.5% for the year, helped by falling food inflation and a lower oil price. “SA inflation could fall to below 5% in late 2017,” he said. Inflation could reach the midpoint of the target by early 2018, before stabilising to 5.5% in the second half of 2018.
Cautious Reserve Bank
Inflation has surprised on the downside during the last couple of months, said Pittendrigh. In the case of the weak economy, it was well expected that the Reserve Bank would cut rates.
“Under these circumstances, although the Reserve Bank is likely to revise down its inflation forecast for both 2017 and 2018 it might not necessarily cut rates any further for the next couple of months” he said. Mountjoy concluded that a rate cut could help ease some of the pressure, but the SARB has to consider the risk of foreign capital outflows.
Sanisha Packirisamy, economist at Momentum Investments, added that the Reserve Bank would likely remain cautious as it indicated financial stability risks continue to pose a threat to the domestic financial system.
A faster than expected rate increases in the US, coupled with lower commodity prices will have a negative impact on the currency. The rand is also still vulnerable to political uncertainty and decisions by ratings agencies.
If the rand weakens, then inflation could pick up again, limiting the scope to cut rates, said Packirisamy.