Global deflation to keep CPI and rates lower than market expects

Oil outweighs a weaker ZAR

Next week sees the release of October’s CPI inflation rate as well as the SARB’s MPC decision. We expect headline inflation rose to 6.0% y/y in October from 5.9% y/y in September due to petrol price inflation. We have forecast food inflation to remain flat at 8.7% y/y in October, averaging 8.3% y/y in Q4:15 and 6.2% y/y in Q1:15, however, risks are to the upside due to the feed through from higher wheat and maize prices in the first quarter of this year.

We expect the SARB to keep the repo rate on hold, at 5.75% at November’s meeting and there is a good chance that they will lower their outlook for inflation in line with the sustained weakness in the oil price. They may also highlight that the rand has remained relatively stable on a trade weighted basis, limiting exchange rate pass through.

In support of our call for no change to the repo rate at this week’s meeting, we note that since the September meeting, the price of oil has declined by about 16%, while the USDZAR has depreciated by approximately 1.4% and the NEER is almost unchanged. Consequently, it will be difficult to justify a hike in terms of deterioration in the inflation outlook. We also think that signs of growth rebalancing in the latest high frequency data are Rand positive, while increasingly asymmetric global monetary policy since the previous meeting should dilute the risks associated with the Fed’s path to normalisation. We will also be interested to hear the SARB assessment of less accommodative fiscal policy post the MTBPS, with respect to its supportiveness of monetary policy.

The 75bps of interest rate increase this year have been pro-cyclical, i.e. into weaker GDP and credit growth. We believe there will only be one more pro-cyclical rate hike of 25bps, and that as with the previous two hikes this will be in response to Rand weakness. At the moment we pin the timing of this hike in Q1:15, however it will be very data dependent.

Commodity prices to outweigh the ZAR and keep inflation below expectations

Commodity prices have been under pressure since mid-August, with precious metals, crude oil and iron ore seeing the brunt of the price decline. On a three month basis, Brent crude prices have declined by almost 22%, gold by 13%, platinum by 19% and iron ore by 11%. However, prices of base metals such as copper, zinc and aluminium have been fairly steady in general (although there are exceptions such as nickel which is down 17% in 3 months. We view the price decline in oil and iron ore as a response to supply side factors, while the decline in precious metals, is largely a function of weak demand.

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