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Standard Bank Group
The SA Daily 18 February 2020

Soft inflation, soft rates

  • Consumer inflation in January 2020 likely increased to 4.6% y/y, from 4.0% y/y in December 2019, largely due to the petrol price base effects dating back to January 2019. January’s forecast risk is high given its many annual price hikes. We expect consumer inflation to average 4.1% y/y in 2020, and then rising to 4.5% y/y in 2021.
  • Consumer inflation has been benign at 4.6% y/y and 4.1% y/y for 2018 and 2019 respectively, with core inflation and rental inflation reflecting both weak consumer demand and the housing market. Also, the output gap has long been negative; the SARB foresees this negative output gap persisting into 2022.
  • Due to benign inflation and SA’s weak economy, the SARB has cut the repo rate by a cumulative 50 bps since July 2019. We expect another cut of 25 bps and perhaps even one more after that this year. With SA’s real policy rate still higher than most emerging and developed economies, this allows the SARB room to ease further should there be no price shocks.
  • However, as monetary policy alone cannot support growth, the SA economy still requires urgent implementation of pro-growth economic reforms to boost both growth and jobs. Moody’s has lowered SA’s growth to 0.7% this year (previously 1.0%) – we are concerned that Moody’s could strip SA of its only investment grade this year.

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