Rand rises as inflation dips to 7-month low

JOHANNESBURG – The rand lifted slightly yesterday after data from Statistics South Africa (StatsSA) yesterday showed that inflation dipped to a seven-month low of 4.5 percent in December – settling in the midpoint of the SA Reserve Bank’s target range of 3 to 6 percent.

At 5pm yesterday, the rand was up 4 cents against the dollar compared with the same time on Tuesday. The dollar was bid at R13.8479 yesterday evening.

Year-on-year, the inflation rate fell to its lowest level since May 2018.

StatsSA said annual inflation slowed mostly for transport amid a sharp slowdown in the cost of fuels, which increased 8.7 percent compared with 23.1 percent previously. 

Petrol and diesel prices fell 184c and 145c a litre respectively in December. 

Analysts said that a rise in administered prices might yet muddy the waters for the inflation outlook.

Portfolio manager at PPS Investments Luigi Marinus said the latest inflation figures should satisfy the Monetary Policy Committee (MPC) that their expectation of a benign rate hiking cycle may be justified.

“Administered prices do remain a concern, however, as an investigation of inflation at a sub-group level shows that water and electricity inflation increased by 11.1 percent and 7.7 percent respectively. Water and electricity collectively make up roughly 7 percent of the inflation basket,” Marinus said.

Inflation decelerated after a stronger rand and lower international crude-oil prices saw fuel prices falling in December and January after reaching record highs in October.

Core inflation, which excludes the prices of food, non-alcoholic beverages, fuel and electricity, remained unchanged at 4.4 percent. 

In the recent MPC statement, central bank governor Lesetja Kganyago alluded to targeting the midpoint of the inflation target band, as well as forecasting inflation to be more subdued in 2019.

Kganyago also reiterated his stance at the World Economic Forum in Davos, saying during an interview that it was important to contain the rate close to 4.5 percent despite concerns over risks to global economic growth.

Experts, however, pointed to embattled power utility Eskom’s application to the National Energy Regulator of South Africa for a 15 percent-a-year tariff increase for the next three years, to stave off effective bankruptcy, as another risk.

Investec economist Kamilla Kaplan said that, barring any elevation in risk, current inflation data suggested that the central bank would keep interest rates on hold at the upcoming MPC meetings.

“However, risks to the inflation outlook remain to the upside, on possible rand depreciation and above inflationary increases in administered prices, particularly electricity tariffs,” Kaplan said.

“Moreover, food prices could come under renewed upside price pressures owing to dry weather conditions that could adversely affect maize production in 2019.”

Last week, the SA Reserve Bank said the near-term inflation forecast generated by its quarterly projection model had improved significantly since the previous MPC meeting. 

It said it now expected headline inflation to average 4.8 percent in 2019, down from 5.5 percent previously, before increasing to 5.3 percent in 2020 down from 5.4 percent and moderating to 4.8 percent in 2021.

Capital Economics economist John Ashbourne said weak inflation and the fading effect of tax changes would ease further during the year.


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