SA’s 5.4% June CPI worth a cheer

‘I think as we celebrate as consumers, we just need to be cautious of that core sticky inflation’: Neo Ralefeta – Investec Treasury Structuring.

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SIMON BROWN: I’m chatting now with Neo Ralefeta from Investec Treasury Structuring. Neo, I appreciate the time today. The CPI number out yesterday – 5.4% for June, the lowest for 20 months. Truthfully, there is some base effect in there, of course, because last June was the first time we got above 7% in the current inflation cycle. That is a good number, and it is something which I think as South Africans we can cheer. The question is whether the MPC – the Monetary Policy Committee which will announce later today – are going to be cheering.

NEO RALEFETA: Good morning, Simon. I think everyone should be cheering at this point. It feels like we’ve been through the worst of it all.

We might be seeing the end of this painful period we’ve been through with high interest rates and high inflation.

But there’s some caution to be exercised. If you look through to core inflation, that seems to be sticky. We expect it in South Africa, and we’re seeing it across the world, especially if you look at last week’s US numbers where their headline inflation came out at about 3%, but their core inflation is quite sticky at about 4.8%.

So we anticipate this sort of trend to kind of permeate across the world. And I think as we celebrate as consumers we just need to be cautious of that core sticky inflation.

SIMON BROWN: The target for inflation is 3% to 6%, so we are back within that target. Of course, the governor always refers to that 4.5%. Are we likely to see a pause today at the MPC, or are they going to raise? And of course, we’ve got the FOMC [Federal Open Market Committee] next week as well.

NEO RALEFETA: I’d like to see a pause. There’s a very low probability of a 25 basis point hike today. If you look back to the last MPC, they increased interest rates by about 50 basis points; but around this time, the Lady R story was still very much in the air. Political risk was elevated, and I think the rand had depreciated to probably the worst level against the dollar.

The Sarb responded with a very big shock in interest rates. We were expecting 25 basis points then; they gave us 50. So I would expect the Sarb to pause today. But if they look through and they look forward and they’re trying to anchor inflation expectations, I wouldn’t be surprised if the MPC increases by 25 basis points one more time and hold at that level for a longer period of time.

SIMON BROWN: That’s the point, perhaps. Again, the governor always refers to that anchoring of inflation expectations, and he wants us to think of low inflation so we don’t go and ask for higher increases, etc. The other trick as well is the currency. If we think that the FOMC raises by 25 points next week, we don’t want to get behind that curve because then suddenly money rushes out, the rand weakens and we bring inflation in.

NEO RALEFETA: That’s the tricky part; we have to make a call before the Americans make a call. And if we anticipate the FOMC increasing by 25 basis points, perhaps from an interest rate differential perspective, to keep SA assets attractive we might need to get ahead of that curve and increase by 25 basis points today.

SIMON BROWN: So today’s call is a tough one. You, I and everyone out there listening would like a pause, but we might get 25 points. The bigger picture is that this is almost becoming semantic. In the next meeting, in the next couple of meetings, we probably are going to see the pause. We may or may not get it today, but we are kind of at that peak now and we can start looking forward to rate cuts, albeit maybe only next year.

NEO RALEFETA: Maybe next year. Even though inflation is back within target, like you mentioned earlier, the governor always talks about 4.5%. We anticipate that inflation will be hovering around this 5% level for the remainder of the year, and maybe back to that 4.5% level sometime mid next year.

So after that, if we see a couple of prints of low inflation we may then start talking about interest-rate cuts. But that’s a story for next year.

SIMON BROWN: So we are not going to get a sneaky November cut. That was potentially on the table, but I think it has probably definitely gone.

NEO RALEFETA: I don’t think definitely gone, but you know central banks across the world. Everything that that we are going through right now is Covid recovery. They’ve been data dependent, because economies haven’t really responded the way central bankers thought they’d respond.

If you look at the labour market in the US for instance, Mr [Jerome] Powell in that economy went to Congress and said he’s really surprised about how the labour market has been performing, given how much he has increased interest rates by.

So that consideration – and maybe data to follow from today onwards – will pretty much guide the Sarb and central bankers across the world regarding how they move with interest rates.

SIMON BROWN: A last question. You mentioned data there, and I’ve got to say central bankers always say that they’re data dependent. But in this inflation cycle – and it’s been a global cycle – kudos to the Federal Reserve, kudos to the South African Reserve Bank, because they really have read the data and stuck to their guidance, which is truthfully what we want.

NEO RALEFETA: Yes, they’ve done that very well. And I think from a South African Reserve Bank perspective, if you look at how the emerging markets basket of countries has responded, they’ve increased interest rates quite aggressively – double-digit policy levels. And I think our Reserve Bank has been cognisant of not choking the economy too much and in that process they’ve sacrificed the rand to keep interest rates low.

We saw the rand weaken quite dramatically on the back of a very competitive interest-rate environment – if you look at what Brazil, Mexico and Hungary have gone to – and I think they’ve done their best to kind of protect the economy from that perspective and curb inflation.

SIMON BROWN: We have a great Sarb and a great governor. We’ll leave that there.

That’s Neo Ralefeta of Investec Treasury Structuring.

Source: moneyweb.co.za

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