Figure 1: CPI inflation versus nominal trade weighted rand
  • The SARB retained its cautious policy stance and left the repo rate unchanged at 6.75% in a 5 – 1 vote, with one MPC member voting for a cut. The decision was in line with market expectations.
  • Risks to the inflation outlook continued to be assessed to the upside, although the degree abated somewhat following the developments since the November MPC.
  • In particular, the rand appreciated by 10.6% on a nominal trade weighted basis, as market sentiment has been influenced by the perceived favourable outcome of the ANC elective conference in December, where Cyril Ramaphosa was elected as ANC president. Also aiding the rand has been the substantial increase in international commodity prices, linked to indications of a continued strengthening in global economic activity.
  • However, the SARB continues to regard the rand as an upside risk with the currency remaining vulnerable to fiscal and sovereign credit ratings outcomes, in February and March respectively. SA’s credit rating with Moody’s is presently one notch above non-investment grade and a downgrade would trigger the exclusion of SA bonds from the World Government Bond Index with the forced selling of local bonds estimated to possibly be as much as R200bn (see figure 3).
  • The appreciated rand has been a mitigating factor to the higher international oil price but the SARB cautioned that international oil price developments could see further upward revisions to its oil price assumption.
  • In the meantime, the stronger currency and lower electricity tariff increase assumptions were incorporated into the SARB’s Quarterly Projection Model (QPM) to yield lower projected inflation (see figure 2).
  • Core inflation was forecast at 4.6% y/y in 2018 and 5.1% y/y in 2019 on demand pressures remaining muted. However, the SARB cautioned that “the closing output gap (…) reduces the degree of downside pressure on inflation.”
  • Specifically, the SARB’s estimated actual economic growth of 1.4% and 1.6% in 2018 and 2019 respectively, would run above potential growth of 1.3% (see figure 4). This indicates the potential for the emergence of some demand led price pressures towards the end of the period.
  • In November the QPM predicted 75bp in rate hikes by 2019. The committee’s model shows that “the third increase is now a marginal call” and that “the timing of the first increase has been pushed out later in the period.”
  • Should the rand strengthen notably further this year, and the new levels be maintained, the SARB may consider an interest rate cut on expected lower inflation. In the meantime, the room to cut is constrained by inflation being forecast at 5.5% over the SARB’s six to 24 month forecast horizon.
Figure 2: SARB CPI inflation forecasts (% y/y)
Figure 3: South African local and foreign currency long-term sovereign credit ratings

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