There was little surprise from the SA Reserve Bank today as the MPC kept rates on hold. More interestingly, there was a significant decline in the SARB’s inflation forecasts, with the 2019 average shifting from 5.5% to 4.8%. The Bank now expects inflation to remain below 5% through 2019.
As a result of this, the Banks’ Quarterly Projection Model now sees only one more 25bps hike by end 2021, down from 75bps in further hikes projected in November 2018. The reasons cited for this move are the combination of lower oil prices, lower realized food price inflation, and a slightly stronger currency. Essentially, the SARB’s inflation forecasts have been too high – and they have now opted for more plausible forecasts. The graph below shows that massive change in the SARB’s forecasts in the last two months. The current forecasts are now quite close to the Investec Asset Maangement forecasts.
In November, we argued that the 25bps hike they instituted at the time was a mistake – and that the SARB’s inflation forecasts were wrong. Today’s MPC statement confirms that view. Given the weakness of growth, the current CPI forecasts warrant the consideration of rate cuts.
The SARB sees the current monetary policy stance as broadly accommodative and the risks to the inflation forecast as moderately on the upside due to electricity prices, rand weakness and volatile exchange rates. Given the relatively hawkish composition of the MPC, we expect the SARB to keep rates on hold through 2019. The Governor did note that policy remained data dependent – therefore further improvement in inflation could open the door to rate cuts, though we think the hurdle for cuts is high, even after the election. The Governor noted that while they saw the risks to growth to be on the downside, the solution was structural reform, which was outside the remit of the Bank. The greater likelihood is that if global conditions deteriorate and the rand weakens, concerns around rate hikes could resurface.
In question time, the Governor was asked about the independence of the bank, which he defended vigorously as being vital to long-term macroeconomic stability of any economy.
SARB & IAM inflation forecasts
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