However, the South Africa economy was also in recession early last year, at that time from the expenditure side, and no interest rate cuts were forthcoming then. CPI inflation has yielded lower outcomes to date this year, versus the same period last year. Nevertheless, the SARB has been at pains to explain that its CPI inflation forecast would need to fall below 4.5% y/y over the six to twenty-four month period (but specifically over twelve to twenty four months) for it to consider a cut. The assumptions the SARB makes in its most recent CPI forecasts show CPI inflation expected around 5.5% y/y in the twelve to twenty four month period, a figure previously signalled as being too close to the upper end of the inflation target range of 3-6% for comfort. Much will consequently depend on the SARB inflation forecasts, which we think will be lowered by about 0.2% y/y, leading to a more dovish MPC tone, but no outright interest rate cut yet.

Specifically, we expect the MPC CPI inflation forecast will fall towards ours of 5.4% y/y this year (MPC currently forecast 5.7% y/y for 2017, and we expect this could fall to 5.5% y/y). For 2018 Investec forecasts  5.2% y/y (MPC currently forecast 5.3% y/y for 2018 and we expect this could fall to 5.1% y/y) and Investec forecasts 5.4% y/y for 2019 (MPC currently forecast 5.5% y/y for 2018 and we expect this could fall to 5.4% y/y or 5.3% y/y). With the likely fall of the MPC’s inflation forecasts, the assumptions the SARB bases these forecasts on then need to fall. Actual growth continues to fall well below potential economic growth in South Africa, with the SARB expecting GDP growth of 1.0% y/y in 2017, 1.5% y/y in 2018 and 1.7% y/y in 2019, versus our forecasts of 0.6% y/y, 1.1% y/y and 1.6% y/y respectively. We expect the SARB will also moderate its GDP forecast closer to Investec’s as the economy continues to underperform, and the output gap widens as demand led inflation is extremely weak.