Higher oil prices and weaker rand a risk to inflation - analysts

The South African Reserve Bank’s monetary policy committee (MPC) is expected to take a hawkish stance and keep interest rates unchanged next Thursday, analysts expect.

The rand and other emerging market currencies lost gains made this week, given a rise in US Treasury bond yields to 3.11%.

The local currency reached an intraday low of R12.82 to the greenback on Friday, as dollar strength surged on the back of US Treasury yields which were still rallying in the afternoon, Wichard Cilliers, director and head of dealing at TreasuryONE, told Fin24.

FNB chief economist Mamello Matikinca said in an economic report released on Friday that the MPC’s decision would be largely influenced by April’s inflation print to be released next Wednesday.

“We don’t believe a one percentage point jump in CPI (consumer price inflation) will be enough to justify an interest rate hike, but we expect the tone of the governor’s speech to turn decidedly hawkish,” she said.

April’s inflation data will take into account the higher VAT rate as well as the fuel hike of 72 cents per litre. FNB expects inflation to increase from 3.8% year-on-year in March to 4.8%. Inflation is still expected to remain within the SARB’s 3% to 6% target band.

“Of chief concern will be the spike in the oil price which reached $80/bbl this week, as well as rand depreciation on the back of a stronger US dollar.

Public sector wages also a factor

“Additional risks stem from the yet to be finalised public sector wage agreement, which if not settled at or near inflation, will raise the prospect of a wage price spiral,” said Matikinca.

Ratings agency Standard & Poor’s is expected to release its credit rating review for South Africa next Friday. Matikinca said it is unlikely the ratings agency would downgrade the foreign and local ratings, or change the outlook from stable to positive.

“While significant progress has been made on re-establishing the credibility of SOE (state-owned enterprise) boards in a short space of time, turning around their financial positions will take far longer, and continues to pose a risk to fiscal consolidation.

“Moreover, the public sector wage agreement is yet to be signed, the Mining Charter finalised, the position on land expropriation clarified, and many of the promised reforms implemented.”

Higher oil prices

RMB economist Mpho Tsebe warned in a market update that higher oil prices and a weaker rand would possibly see the MPC revise the country’s inflation profile. 

“Since the March meeting, oil prices have edged higher and are now close to $80 per barrel compared to the bank’s forecast of $63/bbl for this year and $62/bbl over the next two years,” Tsebe said.

She pointed out that the rand was trading around R12.62 to the greenback compared to R11.84/$ in March. “This, coupled with the prospects of aggressive monetary policy in advanced countries, will make the SARB adopt a cautious stance and leave the policy rate unchanged at 6.5%.”

Investec chief economist Annabel Bishop also expects rates to remain unchanged, with higher interest rates likely in the longer term.

Bishop said among other emerging markets battling with market volatility and investor risk aversion, South Africa experienced the biggest portfolio outflows.

“The rand remains very vulnerable to substantial global market swings. Currency weakness feeds through fairly soon into higher inflation for South Africa, and the trade weighted rand is currently 4.1% weaker than at the last MPC meeting, with particular weakness against the US dollar,” she explained.

Bishop expects the SARB to adjust inflation forecasts. The US specifically is in a rate hiking cycle, expected up until 2020. Bishop said that there is risk of significant rand weakness, given likely upward pressure on US inflation from 2019. This will negatively impact investor sentiment and emerging market currencies.

“Indeed, in the current environment and outlook, the SARB is likely to find it hard to cut interest rates again this year or next, particularly as US interest rates return to neutral levels."

Bishop said the next interest rate move by the MPC would likely be upwards.

Investec’s long-term inflation forecast is around 5.5%.

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