Repo rate unchanged

Dovish MPC Lowers GDP & CPI forecasts

The MPC unanimously decided to keep the repo rate on hold, as expected, at 5.75%. However, the MPC speech was decidedly dovish, which would have come as a surprise to the markets, given the new Governor’s hawkish reputation. The FRA’s expectation of a 25bps hike in the repo rate has now been pushed out to 2H2015.

The SARB has lowered its GDP and CPI forecasts and the Governor made reference to possible delays in the US Fed’s decision to raise interest rates, due to a more benign outlook for global inflation of food and fuel. He stated that “Forward guidance from both the Bank of England and the US Fed is that any adjustment is likely to be gradual, and policy rates may be lower than their estimated long run normal rates for some time despite the improved growth outlooks”.

Even more dovish is the SARB’s comment on the potential second round effects of a sustained decline in the price of oil, “The possibility that oil prices are sustained at current levels introduces a degree of downside risk to the inflation forecast.”

China’s growth is expected to slow as the economy rebalances away from investment, and towards consumption, which is expected to continue to impact negatively on commodity prices. Consequently, global inflation is expected to moderate, assisted by benign food price inflation

The CPI inflation rate was lowered for all three years of the forecast period (2014 – 2016), due to global disinflation, specifically the decline in the outlook for the oil price. Importantly, the risk to the inflation outlook is now considered to be balanced, having been to the upside since the start of 2012. Headline inflation is expected to reach a low of 5.1% y/y in Q2:15, and average 5.3% in 2015 (which is now more in line with our expectation of 5.1%), and 5.5% in 2016, down from 5.7% and.5.8% respectively at the previous meeting of the MPC (fig 2). Inflation expectations for 2014 fell slightly, from 6.2% to 6.1%, which requires an average inflation rate of 5.9% y/y in November and December. It will be difficult to justify a rate hike in 2015, as these inflation forecasts begin to materialise, unless Fed normalisation causes a significant depreciation of the rand, on a trade weighted basis, such that inflation expectations rise.

The SARB’s expectation for food inflation is that it may have peaked in August at 9.5% y/y. We are inclined to agree with this outlook, especially post the CPI release this week, although some upside risks will linger due to the potential feed through from the rise in maize and wheat in Q1:14.

Core inflation is still expected to average 5.6% and 5.7% in 2014 and 2015 respectively, reaching a peak of 5.9% in Q1:15 (previously 5.8%). The outer year’s forecast has been raised from 5.5% to 5.7%.

The SARB cites wages as a potential source of upside surprise to their inflation outlook; unit labour costs increased marginally in Q2:14, to 5.2% from 5.1%, According to Andrew Levy Employment publications, wage settlement rates averaged 8.0% in the first nine months of the year.

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