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Inflation pressures may very well be levelling off

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CAPE TOWN C South Africa’s headline inflation number or CPI rose to.3% year-on-year in June from 6.1% in May. It sometimes keeps inflation over the South African Reserve Bank’s (Sarb’s) target collection of between 3% and 6%, it turned out largely in keeping with expectations.

The increase was driven by an 11% annual rise in food prices, and petrol inflation that rose by 4.2% in June because of the recent 52c per litre improvement in the fuel price. Stanlib economist Kevin Lings however suggested the particular pressures might be levelling off.

“Although we still expect food inflation to elevate just a little further on the coming months, reflecting partly the effect in the recent drought conditions, almost all of the anticipated development of food prices is actually reflected in the data,” he said. “And but the petrol price rose by the further 11c per litre in July, there is certainly a standard daily over-recovery within the petrol valuation on 86c per litre. This implies that the petrol could fall sharply in August 2016, by around 90c per litre. This helps to melt earlier concern about the expected spike in SA consumer inflation through the better half of 2016.”

Lings added that excluding food and petrol, CPI measures 5.9% yet still throughout the target range, while core inflation, that excludes electricity, is in 5.6%.

“The Reserve Bank will remain concerned that core inflation continues to relatively high and shut towards top-end with the inflation,” he stated. “This may be a high-risk that core inflation breaches the top-end of your inflation target in the other half of 2016, which will negatively impact inflation expectations.”

However, he suggested that he or she does not believe this really is enough to cause the Sarb’s Monetary Policy Committee (MPC) to hike loan rates if it meets on Thursday.

“In 2015, the Sarb became concerned with a broadening of inflationary pressure and decided to set out to increase mortgage rates,” he explained. “While this was partly in reply to concerns about inflation, additionally, it reflected their be worried about South Africa’s vulnerability to foreign capital outflows when the Fed attempt to set out to normalise rates. They followed this by using a further hikes of 75bps in 2016.”

However South Africa’s growth outlook is not particularly positive, sufficient reason for uncertainty round the town elections, he expects the Sarb to become cautious.

“This will encourage the Reserve Bank to be able to vigilant, but is not necessarily hike rates,” Lings said. “In plain english, having already hiked rates by 200 basis points because recent low, the Reserve Bank meet the expense of to pause and leave rates unchanged during the short-term.

Chief economist along at the Old Mutual Investment Group, Rian le Roux, agreed that regardless of the higher CPI number, the tough global and native economy help it become unlikely that this Sarb will raise rates.

“While a technical recession in SA isn’t highly likely, as incoming data for your second quarter suggests a rather decent rebound in GDP following the first quarter contraction, the economy continues to be weak enough which the Sarb will always be on hold,” le Roux said. “In addition, the rand has firmed up a whole lot because last meeting C from just below R16 to your dollar to R14.35 for the dollar now C inflation has surprised within the downside and forward-looking inflation outcomes have improved.”

Economist at Rand Merchant Bank, Isaah Mhlanga agreed:

“Our view is usually that the Sarb will on hold at 7.0%,” he was quoted saying. “We are actually saying the Sarb has reached the most notable end with the hiking cycle for a while now, and that we still offer the same view. However, because of the wage negotiations and settlements which are most likely likely to be above inflation, the Sarb may express its discomfort with inflation expectations? which can be also gonna be released while doing so because the rate decision.”

This view was shared by Macquarie Securities economist, Elna Moolman:

“I expect the Monetary Policy Committee (MPC) to have rates unchanged,” she said. “However, the Sarb’s rhetoric may still be somewhat hawkish, because the bank may be concerned the rising, above-target inflation may lift inflation expectations and/or wage settlements.”

She added that while inflation will continue to increasing amount of cost-free 50 % of 2016, the expectation remains to be that inflation will come down this year.

“I forecast average inflation of 6.6% in 2016 and 6% in 2017, with inflation around 5.5% towards end-2017,” Moolman said. “The moderation is actually due to the expected moderation in food inflation, as well as expectation the price pressure from rand weakness should fade.”

Graham Tucker, the manager with the Old Mutual Balanced Fund, believes the Sarb has largely succeeded keeping in mind inflation in hand, which is positive. Also, he argued that when it can do elect to hike rates, this may definitely not contain a negative relation to the economy as it could encourage further foreign investment.

“While South African bonds and money currently offer good returns, an interest rate hike at this point makes Africa even more irresistible to foreign investors seeking additional return with this low yield and return world,” Tucker said. “This you could end up the rand strengthening further that would thus ease pressure for the petrol price, the fee for imported goods as well as inflation rate. Investments determined by a weaker currency would remain negatively impacted, however, the regional bond market could well be expected to perform.”

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