Inflation has improved
The inflation outlook has improved, and is expected to peak lower (6,7% in 4Q16) and return to below 6% earlier (2Q17) than previously forecast, as final domestic demand, especially private sector fixed investment, is very weak.
"The currency has also appreciated through the year, which helps to anchor the inflation outlook. Meanwhile, inflation expectations, an important consideration for SARB, appear to be reasonably well anchored even though at the top end of the bank’s inflation target range of 3% to 6%," says Arthur Kamp, economist with Sanlam Investmests.
"There is lingering concern over possible shocks that could still cause an upset, including uncertainty around the likely pace and timing of US interest rate hikes and lingering domestic economic policy uncertainty. The worry is that a renewed bout of rand weakness could re-ignite inflation expectations and ultimately lift inflation, which is already just below the upper limit of the SARB's target range," he explains.
In addition, the economy finally appears to be adjusting to the sustained currency depreciation in real terms in recent years. Net exports have recovered, to an extent, as reflected in the improvement in the country’s current account balance from a large deficit of 5,3% of GDP in 1Q16 to a much smaller deficit of 3,1% of GDP in 2Q16. This process has been aided by a relative improvement in South African terms of trade and has helped to underpin the rand exchange rate.
"Although the trade surplus may not remain as wide in future months, the general improvement in the trade data in 2016, if sustained, augurs well for some improvement in the real economy into 2017," Kamp says.
If inflation peaks in late 2016 and slows through next year, this should not only be supportive of real household incomes, but should also afford SARB leeway to leave its policy rate unchanged for an extended period of time - provided risk aversion, and by extension currency weakness, does not return.
