Expect inflation rise a day before repo rate news


Cape Town – Economic data being released on Wednesday will likely reveal a rise in inflation, according to several economists.

Annual consumer price inflation for June is expected to accelerate to 6.3% from 6.1% in May, pushed up mainly by the petrol price, according to Nedbank on Monday.

Nedbank’s figures are on par with Bloomberg’s median estimate, revealing that South Africa’s inflation will remain above the South African Reserve Bank’s (Sarb's) 6% inflation threshold.

South Africa’s consumer inflation rate fell to 6.1% in May from a seven-year high of 7% in February, as the rand recovered from January’s record low against the dollar and Sarb lifted its policy rate to 7%, the highest since 2010.

“A partial recovery in the rand, together with weak demand, should limit inflation’s breach” of the target, Mark Bohlund, Africa economist at Bloomberg Intelligence in London, said in a note on July 14. “With the rand having recovered from its January lows, further rate increases may be more difficult to push through.

“Inflation, while still uncomfortable for policymakers, has proved slightly more benign than expected,” Jeffrey Schultz, a senior economist at BNP Paribas Securities in Johannesburg, said in a report on July 13. “South Africa could be nearing the end of its tightening cycle.”

Repo rate to remain unchanged - economists

Inflation data comes as Sarb’s monetary policy committee (MPC) started its meeting to determine Thursday’s repo rate, which it will likely hold, according to all 23 economists in a Bloomberg survey.

“Given the pullback of the rand and the reduced likelihood of any tightening in the US, we forecast that the bank will probably pause the hiking cycle this week,” according to Nedbank.

“Our view is that the Sarb will only raise rates by 25 basis points one more time later this year, but this will be dependent on developments in the currency.”

Standard Bank said on Tuesday that it also only sees one 25 basis-point hike this year, which would take the year-end repo rate to 7.25%. “Worth remembering, the latest MPC statement indicated that inflation would likely remain outside the target range for an extended period, and upside risks remain.”

La Niña could moderate SA food price inflation

As South Africa gets closer to the predicted weakening of the El Niño pattern, and a transition into La Niña, there is a high probability of above normal rainfall early in summer, which would lead to a good 2016/17 crop season, Paul Makube, senior agricultural economist at FNB, said this week.

Should weather forecasts remain on course, South Africa can expect agricultural production to bounce back by mid-2017 resulting in significant moderation in food prices, particularly grains. Fruit and vegetable prices could also ease towards the end of the year as conditions improve, said Makube.

“Due to the impact of the drought, the country will be a net importer of maize this year as a result of domestic supply shortages. We experienced a shortage of both the yellow and white maize which are commonly used for livestock feed and staple food, respectively. The sector also shed an estimated 37 000 jobs in the fourth quarter last year,” said Makube.

“This, coupled with a weak rand, led to an excessive increase in food price inflation, directly impacting lower income households across the country.

“Although the impact of La Niña will not be felt immediately, it will bring long-term relief to struggling consumers that are currently finding it difficult to make ends meet.

“Favourable changes in weather patterns could result in South Africa producing enough maize during the 2016/17 season as production is dependent on rainfall during growing season which is normally between October and April.

“A good rainfall season will lead to lower grain prices and improved grazing conditions for livestock farmers who would be entering a herd rebuilding phase. This would directly result in a moderation of meat (pork, poultry) and dairy prices.

“In the case of beef, prices are however expected to remain elevated due to supply tightness as herd rebuilding takes a bit longer. South Africa would also be in a good position to recoup its losses and grow its export revenue for next year.   

“Moreover, small-scale farmers who are also finding it difficult to produce enough food to feed their families would also breathe a sigh of relief.

“On a positive note, dam levels in the Western Cape have shown a slight recovery in recent weeks. The medium to longer term rainfall outlook for the province is relatively good, with light showers expected which will be beneficial for the winter crop. It will also replenish dam levels and possibly help ease water restrictions for the region.

“However, the situation for the rest of the country is expected to remain unchanged until we get La Niña induced rainfall in spring or early summer.

“Despite the benefits of La Niña, it will take commercial farmers about two years to fully recoup financial losses incurred due to the drought.

“As the uncertainty around weather patterns continues to increase due to climate change, it is important for farmers to explore new farming technology and strategies to ensure sustainability of agriculture and food security,” said Makube.

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