With inflation printing at 2.6% in August, short-term inflation fears were put to bed as risks to the downside proved to be persistent. The August reading was in line with our forecasts and 0.1% below the reading recorded the previous month. We have maintained the view that inflation is yet to reach its trough and in the month under review, the deceleration reached 2.6 percent, the lowest inflation rate we have on record.
This marks the eight consecutive month that inflation came in either at the 3.0 percent lower bound or below. The short-term inflation outlook has been easier to predict with a reasonable degree of confidence given globally low inflation rates as well as soft domestic demand demonstrated by a stable core inflation rate of 3.6 percent.
A month to month analysis of the Consumer Price Index (CPI) revealed that the sub-indices were generally stable recording changes of less than one percentage point. This was an expected result given the absence of any price shocks during the period. Stable food prices and a continued deflationary trend (albeit declining in magnitude) in the transport sector owing to low fuel prices once again ensured that inflation decelerated on a month on month basis as well as when compared to the same period of the previous year at 3.0 percent. On the food side, FX pass-through remained limited as the pula continued to hold strong relative to the rand, resulting in contained tradeable inflation of 1.5 percent, the same rate printed in July 2016.
On a year-on-year basis, the Miscellaneous Goods & Services category showed the biggest price increase of 7.4percent, mainly due to higher Insurance and Tax license fees which contributed 0.6 and 0.1 percentage points respectively towards the headline inflation. Second to this category was the Food and Housing categories each of whom contributed 0.6 percent towards inflation.
While a call on commodity prices can be quite a difficult task, we believe the oil price should continue to hover around current levels, approaching $50 towards the end of the year as global oil inventory levels continue to decline. From a local pricing point of view we do not see any significant upside pressures on fuel prices in the short to medium term given the cushion provided by the National Petroleum Fund.
However, this benefit will be limited by the extent of the pula’s depreciation against the dollar, mainly influenced by the rand on fears of junk status, which now seems imminent. The rand has nonetheless been enjoying a rally as risk appetite recently returned to markets. Most risks to this rand strength are now more from domestic factors than global. A weaker Pula will be negative for inflation due to the higher cost of imports. Food inflation in South Africa has remained stubbornly high due to a weaker rand and regionally dry conditions. This also poses a threat to the level of inflation that could be imported into Botswana through trade.
Notwithstanding the aforementioned risks, we still expect domestic inflationary pressures to remain subdued for the year, with a gradual uptick in the first half of 2017. Barring any major shocks, we don’t anticipate significantly higher CPI rates. Inflation will likely average 3.0% for the year. Given the latest interest rate cut implemented by the Monetary Policy Committee during the month under review, we expect that rates will remain unchanged to the end of the year.
While it can be argued that the benign growth and low inflationary pressures present an opportunity for the committee to ease further, we are of the view that the committee is mindful that most of its trading partners are in a hiking cycle and therefore would not want to materially deviate from historical averages that have been maintained in terms of the real exchange rate differentials to keep the local unit competitive.
(Tshephang Loeto, investment analyst, Investec Asset Management)