The base effect of the lower oil price (which at the beginning of the year drove inflation down to 3.9%); continued currency pass through from a weakening rand; increasing drought-related food prices; and above-inflation wage settlements will drive inflation upwards, Schoeman said yesterday.
Citibank’s forecast inflation peaking at 7.2% in the first quarter of 2016 (significantly above the SA Reserve Bank’s 6.8% forecast) and remains above 6% for the remainder of the year. Any electricity tariff increases would lead to an extended breach in the inflation outlook, Schoeman said.
“The Reserve Bank did signal if there is one thing they are intent on it is to manage price expectations and keep price stability in the economy. This is why they will remain hawkish even if growth remains weak,” Schoeman said.
She believes rate hiking will be gradual, forecasting a 25 basis point (bp) rise next week, another 25bp increase in September and then a cumulative 50bp increase spread across March and May next year. This 100bp hike over the next 12 months will bring inflation back below 6% by the beginning of 2017, Schoeman said, noting that was the “softest most gradual hiking cycle ever seen in the history of South Africa”.
Head of equities at Citibank Alec Schoeman said forward-rate agreements were pricing in a 33bp hike next week. Citi’s forecast is that the South African economy grows at 1.7% this year, rising to 2.1% in 2016.
Schoeman said until South Africa overcomes its electricity woes, the consumer will continue to pull the economy along as productive sectors such as mining and manufacturing come under pressure. The first-quarter consumer confidence reading is at its lowest in 14 years, according to the FNB/BER Consumer Confidence Index.
Schoeman said the Reserve Bank (managing low growth and high inflation) and National Treasury (keeping the expenditure ceiling under control) remained two pillars of institutional strength, preventing SA being downgraded to sub-investment grade by ratings agencies.
Citi South Africa’s new country officer, Dennis Evans, said government and the public sector were focus areas for Citi. Evans, originally from the West Indies, takes over from American Donna Oosthuyse.