Interest rate outlook: the monetary policy outlook has likely become neutral following the market positive outcome of the recent ANC election

15 Jan 2018

Annabel Bishop

Chief Economist

Figure 1: SA Consumer Inflation: history and forecasts
South Africa saw economic growth of 2.0% to 3.0% in the last two quarters of published data, while the nominal trade weighted rand has strengthened by about 10% since the previous MPC meeting, and CPI inflation is at 4.6% y/y, versus the mid-point of the 3-6% inflation target of 4.5%. While the figures do not look poor on face value, the GDP figures are led by the recovery in most areas from SA’s drought, while CPI inflation has moved lower on the moderation in food price inflation, and the rand’s strength occurred only in late December/early January on Cyril Ramaphosa election to president of the ANC. The positive effects of drought alleviation are expected to wear out mostly in the first half of year, while the Monetary Policy Committee targets CPI inflation only in the six to twenty four month period, which currently translates to the second half of this year and 2019. It has specific focus on the twelve to eighteen month period, where inflation is likely to be running closer to 5.0% y/y. While we expect CPI inflation can fall further in Q1.18, it is likely to bottom, and then climb over Q2.18 and H2.18 on base effects, commodity price pressures and some improvement in demand. The SARB forecasts CPI inflation at 5.5% y/y in the second half of 2018 and 5.5% y/y in 2019, but will likely lower these forecasts to closer to 5.0% y/y and 5.3% y/y. However, the MPC’s inflation revisions are unlikely to be around 4.5% y/y for the period (H2.18 and 2019), indicating that on a strict interpretation the SARB would be unlikely to cut interest rates at its January 2018 meeting, but the tone could become neutral to somewhat dovish after the hawkish stance at the previous
Figure 2: Forecasts
Figure 3: Commodity price indexes vs industrial production growth and real oil prices

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