Standard Bank study optimistic on inflation

By Ethel Hazelhurst

Johannesburg - Many primary drivers of inflation have improved, according to economic research published by Standard Bank.

The bank predicted that when the Reserve Bank monetary policy committee (MPC) meets next month, it will confine itself to "hawkish rhetoric" and stop short of action.

The MPC held rates stable at its meetings in April and February, after a 2 percentage point hike in its official
repo rate last year to 9 percent.

"The MPC may reveal marginally lower inflation forecasts … at its next meeting, as long as inflation expectations and wage negotiations remain reasonably benign," the bank said.

Reasons for Standard Bank's optimism include the fact that the rand has strengthened by 3 percent on a trade weighted basis since April; maize prices have fallen by 1.6 percent; meat prices have moderated; and the oil price has drifted almost 2 percent lower.

The bank identified the most immediate risk to "the
favourable inflation and interest rate outlook as inflation expectations". Linked to this is the outcome of the current round of wage negotiations.


"Wage demands have surged since the previous MPC meeting and the monetary policy review [released last week] revealed a 5.9 percent year-on-year rise in unit labour costs in quarter four of 2006," Standard Bank said.

"This indicator is notoriously volatile and therefore needs to be interpreted cautiously," it warned.

"But rising actual inflation and the occasional breaching of the target ceiling could stoke these pressures further, and the MPC could become concerned about a possible wage price spiral."

The Reserve Bank's quarterly forecasts mask the possibility that CPIX (consumer price index minus the impact of mortgage rates) inflation for certain months could breach the ceiling of the 3 percent to 6 percent target range.

The bank sees CPIX breaching the target in April and May but being "target friendly thereafter".

Its forecasts for inflation are similar to those of the Reserve Bank: inflation will hug the ceiling of the range in quarters two and four, with a "short-lived dip in quarter three".