June CPI and rate outlook

Inflation data for June has come in lower than expected, despite a sharp rise in fuel costs, lending itself to the suggestion that the reserve bank will keep lending rates unchanged.

The South African Reserve Bank (SARB) concludes its Monetary Policy Committee (MPC) meeting on Thursday the 19th of July and in turn, will announce changes (if any) to benchmark lending rates within the country.

Consumer Price Index

Consumer Price Index (CPI) data is a key metric for the Reserve Bank in determining the path of interest rates as their mandate is to target inflation with monetary policy. Wednesday’s CPI report from Statistics South Africa, for June 2018, showed an annualised increase in headline inflation of 4.6%. The figure was slightly higher than that of the May 2018 inflation reading (4.4%), although still below consensus estimates which predicted a 4.8% increase in inflation. The most noticeable price increase (as expected) has been that of fuel costs which increased by 13.5% annualised. Fuel costs account for roughly a 5% weighting in the CPI index. Food which has the largest weighting (15.5%) in the Headline CPI figure, has seen inflation subdued at 3.1% annualised, attributable to a healthier looking agricultural sector. 

The rand

A rand is often seen as a fear factor for the SARB, as its volatility and sensitivity to risk off sentiment can negatively impact inflation particularly that of fuel costs. However, while we have seen a weakening of the rand against the majors (since February 2018) with relatively large capital outflows from bond and equity markets over the last three or so months, the year on year change in the dollar Rand exchange rate is roughly only 1.8%.w

SARB 18072018

Monthly chart showing change in USD/ZAR over the last year

Rates Decision

With inflation being realised below Reserve Bank estimates, it seems unlikely that lending rates will change at this MPC meeting, especially while economic growth remains weak in South Africa. In turn, the repo rate is expected to remain at 6.5% and the Prime lending rate at 10%.

Macro catalysts, such as the ongoing trade war debacle and diminishing favour for emerging market will see the SARB raising caution on the risk factors relating to the rand outlook, possibly weakening its forecasts on the currency. The rising oil price will likely see forecasts thereto being raised as well. These risk factors combined with the more hawkish tone we have seen from the Reserve Bank Governor, suggest that rates are unlikely to continue to be cut, but are rather more likely to remain flat for the remainder of the year, before eventually being raised marginally in the New Year.

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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