SARB sounds inflation warning

The hawkish statement by the South African MPC today is likely to focus attention in the markets on the possibility of rate hikes over the coming months. However, while inflation will remain well above target over Q1, this should be temporary and we think it will then fall more quickly than most anticipate by the middle of the year. We therefore don’t expect policy to be tightened in the near term and expect talk to turn to loosening by the end of this year. Elsewhere, Nigeria left interest rates on hold today and, while policymakers clearly want to give support to the economy, strains in the balance of payments mean that there will be little room to do so over the coming months. For our part, though, we think the MPC will look through above-target inflation in the coming months. Headline inflation will, after all, be driven by high food and energy inflation. Core inflation should remain within the SARB’s target range. Moreover, the latest activity data provide further evidence that the economy is extremely weak; our GDP Tracker suggests that it barely grew in Q4.