Higher inflation to see SARB keep interest rate steady - analysts

The higher inflation print for April makes a stronger case for the monetary policy committee (MPC) to keep the repo rate on hold, according to analysts.

Statistics South Africa on Wednesday released April’s consumer price index which was at 4.5%, compared to 4.1% reported in March.

Fuel hikes and increases in so-called sin taxes drove up inflation, while the impact of the value-added tax increase by one percentage point was more muted, FNB senior economic analyst Jason Muscat said in a statement.

“Overall, the number paints a picture of still well contained inflation," said said Muscat.

FNB expects retailers to begin passing the higher VAT costs on to consumers over the coming months once all their pricing systems have been updated, but the bank sees inflation remaining at about 5% until the end of the year.

“We do, however, acknowledge the growing risk posed by a softer rand –  on the back of a stronger dollar – and an oil price that is hovering at the $80 per barrel mark.”

Muscat expects the MPC to keep the repo rate at 6.5%. “We expect rates to remain flat for the balance of the year,” he said.

In a report, Investec economist Lara Hodes shared views that substantial fuel price rises in the coming months, off the back of higher oil prices and a weaker rand, could drive up inflation.

“Taking into effect these inflationary pressures, with risks to the upside, together with concerns over the faster pace of normalisation in US monetary policy, it is unlikely that the MPC will adjust the repo rate tomorrow,” she said.

Investec revised its inflation forecast for 2018 to 5.1% for 2018 and 5.5% for 2019.

PwC economist Christie Viljoen noted that April’s inflation ended a 12-month decline in headline inflation. But the figure still remains within the Reserve Bank’s target band of 3% to 6%.

“A turning point in inflation and depreciation in the rand since the last MPC meeting will likely result in interest rates being kept on hold this week.

“The rand traded at R12.60/$ this morning compared to just below R12/$ some two months ago,” said Viljoen.

Momentum Investments expects a “stable outlook” for interest rates and possibly a cut in the third quarter of 2018 provided inflation expectations shift to the midpoint of the target band, economist Sanisha Packirisamy said in a report.

Rand risks and the threat of higher oil prices could prevent inflation reaching the midpoint of the target band, Packirisamy explained.

“The SARB may opt to leave interests rates unchanged for some time, given the expectation of a closing output gap and its reluctance to act in a pro-cyclical manner,” she said.

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