Basket

EC

SEIFSA WELCOMES EASING OF INFLATIONARY PRESSURE

By 21st Aug 2014Sep 20th, 2019No Comments

Inflation slowed down to 6,3% during July, compared to 6,6% over the previous two months. This is the first sign of actual easing, desperately needed to eventually lower inflation expectations which seemed to have been the one worrying factor influencing the South African Reserve Bank’s decision to increase interest rates.

SEIFSA Economist Tafadzwa Chibanguza said a myriad and complex interaction of variables had resulted in this outcome.

“On the supply side, the cost of fuel has had a notable positive impact on the direction of the index. Brent Crude oil has been relatively stable and the price has decreased continually,” he said.

Mr Chibanguza added that a relatively volatile Rand in the recent past (between $1/R10:35 to $1/R10:70) was not enough to neutralize the effect. Muted global economic growth and lower oil demand due to the shift to other forms of energy in the United States contributed to the downside pressure on oil.

Domestically food inflation (maize and wheat prices) has shown some easing, further contributing some downside pressure. Housing and utility inflation contributed most to July’s reading.

“This is a function of the time of the year, during which annual utilities and electricity price increases are put through and again highlights the negative impact of administered prices on the economy. In contrast, muted domestic demand in the economy has contributed to downward pressure,” Mr Chibanguza said.

He added: “It is estimated that the Reserve Bank’s interest rate increases take up to three months to filter through to consumer inflation. Therefore, one can assume that the repo rate increases earlier this year have started to contribute to the easing in inflation.”

Production inflation had also shown some easing path over the last two months, which is further good news. It has significant relevance on the amount of inflationary pass through to consumer inflation.

Mr Chibanguza said the elephant in the room was the possible confidence-harming impact of Moody’s downgrade of the four major banks, probably triggered by the African Bank saga. He said that this brings with it the danger of exchange rate depreciation and tells the critical story of a systemic problem in the debt burden in the economy.

Mr Chibanguza said that the irony was that consumers have been slowly repairing their balance sheets and that the African Bank occurrence is probably an overhang after the event. He hoped that the worst has passed, adding that there was a small chance that banks may take a critical look at their credit policies and further tighten credit extension.

“However, we’re of the view that if the current domestic trends persist, it would be logical to expect the Reserve Bank to leave rates on hold at its next (September) Monetary Policy Committee meeting,” Mr Chibanguza concluded.

 

Leave a Reply