SA economy sluggish, US economy waddles on

Arthur Kamp, Investment Economist at Sanlam Investments.

Consumer price inflation (CPI) slowed to 3.9% for the year to February 2015 from 4.4% in January 2015. This largely reflected a sharp fall in petrol prices. Despite this, core inflation remained sticky at 5.8% in February 2015.

In its March 2015 Monetary Policy Committee (MPC) Statement, the South African Reserve Bank indicated it believes the slowdown in domestic inflation is temporary and forecasts an increase in headline CPI to an average of 5.9% in 2016, including a temporary breach of the upper end of its inflation target range in 1Q16. The MPC Statement also emphasises the sluggishness in domestic economic growth and stresses the upside risks to inflation. At the conclusion of its meeting, the MPC decided to leave the Bank’s repo rate unchanged at 5.75% p.a.

Abroad, world markets are watching US monetary policy closely. At the conclusion of its March 2015 meeting the US Federal Open Market Committee (FOMC) indicated that it needs to see further improvement in the labour market, while being relatively certain inflation will return to 2% in the medium term, before hiking its policy rate. Still, the US Federal Reserve projects a rising trend in the federal funds target rate, commencing this year. The FOMC currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may warrant keeping the target federal funds rate below levels it views as normal in the longer run.