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Expect inflation, interest rates to rise – Citi

JOHANNESBURG – Inflation will rise to 5% next week and the trajectory from here on will climb “at quite some speed”, according to Citibank economist, Gina Schoeman. This will likely lead the Reserve Bank’s Monetary Policy Committee, when it meets next week, to hike rates by 25 basis points, Schoeman said.

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 told journalists at Citi South Africa’s Sandton headquarters.

Citibank’s forecast is that inflation peaks at 7.2% in the first quarter of 2016 (significantly above the Sarb’s 6.8% forecast) and remains above 6% for the remainder of the year.

Any electricity tariff increases, will lead to an extended breach in the inflation outlook, Schoeman said.

As a result of rising inflation expectations, the financial services firm anticipates a rate hike from the Reserve Bank next week.

“The Reserve Bank did signal that 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 this was the “softest most gradual hiking cycle ever seen in the history of South Africa”.

Citi’s forecast is that the South African economy grows at 1.7% this year, rising to 2.1% in 2016.

Schoeman said that 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 from strained electricity supply. This is reflected in the graph below:

Screen Shot 2015-07-16 at 1.06.14 PM

Consumers have, however, come under increasing financial pressure and seem less optimistic about economic prospects in light of load shedding, a weak rand and job cuts. This is reflected in weak retail sales for May and a first-quarter consumer confidence reading 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 South Africa from being downgraded to sub-investment grade by ratings agencies.

Speaking to media for the first time since being appointed Citi South Africa’s new country officer in January 2015, Dennis Evans, said that government and the public sector were focus areas for Citi. He described Citibank as a “great friend of the government of South Africa”, suggesting it was there to support it through current challenging times.

Evans, originally from the West Indies, takes over from American Donna Oosthuyse, who came to South Africa in 1995 to re-establish the Citi franchise (it left the country in 1988 after some 30 years here). Oosthuyse was appointed director of capital markets at the JSE in August.

Head of equities at Citibank, Alec Schoeman, added that forward-rate agreements were pricing in a 33bp hike next week.

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By |2015-07-17T10:21:12+02:00July 17th, 2015|LATEST NEWS|Comments Off on Expect inflation, interest rates to rise – Citi

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