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South African Reserve Bank:Easing bias

作者: 企业文化  发布:2019-10-09

As expected, both CPI and WPI inflation rose quickly in July, led primarily by risingvegetable prices. But this is not the entire story. Core inflation ticked up aftermoderating for three straight months. Much of this can be attributed to policychanges, namely the implementation of the Housing Rent Allowance and the initialimpact of the Goods and Services Tax regime. Looking through the short termnoise, we expect underlying inflation to rest at the 4% ballpark, which alsohappens to be RBI's inflation target. We expect the RBI to be on a prolonged pausefrom here onwards with risks of a 25bps rate cut at year end if CPI inflationundershoots the 4% target by a comfortable margin.

    The Bureau for Economic Research’s Q2 inflation expectations report released on the sameday as the SARB statement also showed a welcome moderation. Expectations softened to5.9% in 2017 (down 0.3pp) and to 5.8% in 2018 (down 0.1pp) mainly thanks to weaker inflationprojections from financial analysts. While these remain anchored close to the upper-end of thebank’s target band, the MPC is also likely to have taken comfort in the fact that five-yearbreakeven inflation rates continue to soften: so far this year they have fallen by around 100bp.

CPI inflation is likely to have slowed to the mid-point of the South African Reserve Bank’s3-6% inflation target band in July.

    The SARB lowered its inflation estimates for 2017, 2018 and 2019, citing recent softer-thanexpectedCPI prints (including core), a lower oil price trajectory and a relatively “resilient” (albeitvolatile) currency. The bank now expects headline CPI inflation to average 5.3% in 2017 (down0.4pp), 4.9% in 2018 (down 0.4pp) and 5.2% in 2019 (down 0.3pp). Critically, it continues toexpect the CPI to remain well within its 3-6% target range throughout its entire forecast period.

    A further moderation in food prices, a return to fuel price deflation and lower electricity tariffswill be the major drivers behind the lower July print.

    The SARB has consistently downgraded its estimates for inflation at each of its four meetingsthis year (Chart 1). Our expectation for the CPI to average 5.0% in 2017 and an even lower4.8% in 2018, indicates to us that the bank (along with the consensus) will continue to makedowngrades to forecasts at coming meetings (see South Africa: Disinflation nation, 14 July).

    We expect core CPI inflation to slow to 4.7% in July, with a further structural slowdown likelyin the medium term, in light of the persistent negative output gap and lower unit labour costs.In this environment, we see scope for the SARB to deliver a cumulative 100bp in ratereductions this cycle, which would leave real rates close to our r* estimate of 1.5%.

The South African Reserve Bank (SARB) monetary policy committee (MPC) cut policy rates by25bp to 6.75%, against expectations. Its decision comes a meeting earlier than our counterconsensusforecast for a September move. The bank was clearly more dovish in itscommunication on inflation and growth, confirmed by the fact that four members of the sixstrongcommittee voted in favour of a 25bp rate cut compared with only one in March and May.

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