Fuel hike, rand weakness to drive up June inflation - economist

The fuel hike and rand weakness will likely drive up June inflation; however, the Reserve Bank is expected to keep interest rates on hold, say economists.

In separate market updates, economists have shared their insights on economic data to be released in the coming week. May’s retail sales and June’s consumer inflation data will be released by Statistics South Africa on Wednesday, and on Thursday the Reserve Bank’s Monetary Policy Committee (MPC) will announce its rates decision.

FNB chief economist Mamello Matikinca noted that May’s inflation was below market expectations of 4.6%.

"Despite the relatively muted price pressures following several tax increases instituted in April, we expect the June inflation print to accelerate 4.8% year-on-year.

"The 82c per litre increase in the price of fuel in June and marked rand weakness are the main factors driving this expectation," Matikinca explained.

The interest rate may remain at 6.5%, and analysts would be focusing in on the tone of the statement, she added. "While the Governor of the Reserve Bank, Lesetja Kganyago, was decidedly less hawkish than we had anticipated at the previous MPC meeting, we do not think that this will be the case at next week’s meeting."

Matikinca said risks which may be identified in the next meeting include the stronger dollar, higher oil prices, public sector wages and Eskom tariff increases. However, FNB expects inflation to remain within the 3% to 6% target band over the medium term, and interest rates may remain steady until 2019.

Investec economist Lara Hodes expects inflation to accelerate to 4.7%, mainly due to the higher fuel price. Hodes also expects the Reserve Bank to keep rates on hold, and lower expected consumer inflation outcomes for the year.

If the Reserve Bank lowers its inflation forecast for 2018, then consumer inflation for 2019 may start at a lower point, she believes.

Retail sales

Hodes noted the surge in consumer confidence during the first quarter of the year, but confidence levels for the second quarter may subside "materially" as the buzz around President Cyril Ramaphosa’s reforms wane.

She added that May’s retail sales data would give a better indication of how the trade sector has performed during the second quarter.

"May’s figure is likely to reflect a muted economic growth climate," she said. A retail survey by the bureau of economic research for the second quarter reflected that business conditions in the retail sector had deteriorated.

Matikinca is of the view that May’s retail data may reflect that consumer buying patterns are normalising; however, there is evidence that household consumption may not be holding up as well as expected.

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