25 May.
Absa Emerging Markets Research: SA Morning Sheet.
Last night’s Monetary Policy Forum hosted at the SA Reserve Bank and the release of the Bank’s Monetary Policy Review yielded much the same rhetoric as that observed in its most recent MPC statement. At present, the SARB continues to see very little evidence of demand-driven inflationary pressures in the economy, with the main upward pressures on prices coming from supply-side (cost-push) factors in food, fuel and wages. The MPC continues to project CPI to reach the upper 6% inflation target band by Q4 2011, breaching the upper limit in Q1 2012 and reaching a peak of 6.3% before moving back within the upper bound of the target for the remainder of 2012.
The SARB does not seem to see inflation at a level of around 6% as a major concern, as during the Q&A session the Governor indicated that only if/once its projections show that CPI moves away from the 6% target ceiling on a sustained basis, it would look to raise interest rates. Therefore, in our view, we would have to see a fundamental change in shape of the SARB’s inflation forecast trajectory further out (i.e not tapering back into the target) in order for the Bank to warrant hiking rates sooner rather than later.
On economic growth, the Governor continued to stress the point that although the global economy may be out of recession, “it is not out of the crisis” and many uncertainties remain (citing geopolitical risks in the MENA region, the Japanese earthquake crisis and peripheral European and US fiscal consolidation concerns). Domestically the SARB continues to expect growth to remain below potential for some time, forecasting the economy to grow 3.6% in 2011 and 3.9% in 2012.
Overall, we believe that the MPC’s relatively dovish domestic growth outlook, together with its observation that the bulk of price pressures in the economy are supply-driven in nature and that over the medium term CPI is forecast to hover around the 6% level (and not moving sustainably away from the target), suggests to us that, at this stage, it is in no hurry to hike interest rates. Therefore, we continue to forecast the hiking cycle in South Africa to commence only in January 2012 and expect a cumulative 250bp in interest rate hikes throughout next year.
Data out yesterday showed that the SARB leading economic index slowed to 135.0 in March from an upwardly revised 136.2 in February. According to the SA Reserve Bank, which compiles the index, seven of the ten sub-components making up the headline index contributed to the m/m fall, while only three increased. The largest negative contributors to the fall in the index came from the twelve-month percentage change in the business cycle indicators in many of SA’s key trading partner countries, as well as a smaller y/y change in job advertisement space in local newspapers. …
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