Subdued inflation will keep rates on hold

October’s annual consumer price inflation (CPI) rate of 5.9% is very much in line with expectations and should reassure the market that underlying inflation is reasonably contained. The South African Reserve Bank (SARB) will therefore, in all likelihood, keep interest rates on hold tomorrow.

Interestingly, going into the last monetary policy committee (MPC) meeting of the year, the current rand/dollar exchange rate is very similar to the rate at the time of the first MPC meeting of the year (when the rand was trading at R11.10/$). However, the inflation outlook has changed quite dramatically since January, when the SARB hiked interest rates for the first time during this cycle.

The biggest factor in this regard has been the drop of $30 per barrel in the oil price in the last three months. If the price stays at these levels, or even if it should increase to $90 per barrel, it will be significantly positive for inflation.

The effect of the fall in food commodity prices over the past year should also not be underestimated. While consumer food prices have increased, the lower commodity prices should see food inflation come down in the coming months.

Globally, the economic environment remains weak and expectations of rapid rate hikes in 2015 in the US have dissipated. Locally things aren’t brighter: the growth outlook remains weak and consumer spending has been reined in drastically.

Given these conditions, we see no reason for Governor Lesetja Kganyago to hike rates tomorrow. We expect inflation to be below 5% by the end of the first quarter of 2015.