Core inflation, calculated as CPI excluding food and non-alcoholic beverages, fuel and energy prices, moderated to 4.8% y/y in April from a prior 4.9% y/y and from a recent peak of 5.9% y/y in December 2016. This partially reflects the lagged effects of past rand appreciation and weak demand led inflationary pressures.


Much of the deviation between consensus expectations and the actual headline CPI outcome can likely be accounted for by food price developments. Although food prices were expected to continue moderating, the extent of the deceleration, to 0.0% m/m from 0.5% m/m in March, will likely have been on the downside of expectations. In annual terms, food inflation subsided to 6.6% y/y from 8.7% y/y previously, with the contribution of the food price component to headline CPI decreasing to 1.0% in April from 1.3%.


Food price growth at the agricultural level contracted in Q1.17 and price pressures at the manufactured level have been abating since August 2016, supporting the food price disinflation at the retail level.


The transport component also made a smaller contribution to headline annual CPI of 0.7% in April compared to 1.1% in March, with petrol and diesel prices declining by 24c/litre and 10c/litre respectively.


The inflation trajectory is expected to recede back into the target range in 2017, on softer food price growth and a continued absence of meaningful demand led inflation.


It can be expected that at tomorrow’s MPC meeting, the SARB will lower their 2017 CPI inflation forecast from the current 5.9% y/y. A substantial adjustment to the 2018 forecast of 5.4% y/y is not expected. For the SARB to consider a reduction in interest rates there would need to be “a more sustained improvement in the inflation outlook”, according to the March MPC statement. Specifically, the SARB would likely need to see inflation falling towards the mid-point of the target (4.5% y/y).

On account of the SARB’s CPI forecast remaining near the upper end of the inflation target and concern regarding rand exchange rate volatility, we expect the SARB to retain a cautious policy stance and keep interest rates on hold this year.