With a slight decrease in consumer price data released Wednesday, the South African Reserve Bank (SARB) could possibly reduce its policy interest rate Thursday:
SocGen Analyst Phoenix Kalen writes:
” … the reserve bank’s prudently hawkish rhetoric [has been] espoused over many previous rate-setting meetings. However, we believe the balance of dynamics on monetary policy has shifted distinctly in favour of not merely a rhetorical shift, but of implementing an outright looser policy stance. We anticipate that hawkish rhetoric will accompany the split-vote 25 basis-point rate cut decision…
SARB is likely to revise medium-term inflation projections lower. … March and April inflation outcomes surprised the reserve bank to the downside. We believe today’s June CPI release (5.1% YoY vs. market expectations of 5.2% YoY) likely also came as a downside surprise. Importantly, we believe that the SARB will likely revise lower its average headline and core inflation forecasts for this year and next year. Headline CPI may be lowered by approximately 0.2 percentage point, to 5.5% for 2017 vs. 5.7% previously, and to 5.1% for 2018 vs. 5.3% previously. Both headline and core inflation are likely to trend lower over the coming months, variously aided by globally lower oil prices, moderation in food price increases, lower-than anticipated electricity tariffs, and a more resilient currency. At a macro level, South Africa is part of a global story of disinflation that is more keenly experienced in emerging economies versus developed economies, resulting in greater monetary policy space for the SARB at an opportune moment.
The domestic economy is in sore need of support. The South African economy has entered a technical recession, characterized by two consecutive quarters of QoQ economic contraction (0.7% QoQ contraction in 1Q17, 0.3% QoQ contraction in 4Q16). As the SARB stated in its May statement, “the output gap is estimated to have widened, and consumer demand has weakened.” Greater economic slack stemming from an increasingly negative output gap will likely insulate against sharp increases in near-term inflation. We anticipate modest downward revisions to the SARB’s current GDP projections of 1.0% for 2017, 1.5% for 2018, and 1.7% for 2019 …”