CAPE TOWN: Inflation in South Africa fell to 6.3% year over year in March from 7% in February, but remains higher than the government’s target range. The iShares MSCI South Africa exchange-traded fund (EZA) was lower in early trading. The ETF is up 20% this year after sinking 28% in 2015. The South African rand (ZAR) has strengthened by nearly 2% this week against the dollar, and is stronger by 8% so far this year.
Shares of energy company Sasol (SSL) were up 0.7%, while shares of telecommunications services company MTN Group (MTNOY) rose more than 2% and media company Naspers(NPSNY) fell more than 3%. South African gold miners AngloGold Ashanti (AU) and Gold Fields (GFI) were up 1.5% apiece, and Sibanye Gold (SBGL) was also moving higher in recent trading.
The South African Reserve Bank’s inflation target range of 3% to 6% proved elusive in March due to currency strength, and also drought, which boosted food prices nearly 10% for the month. Capital Economics expects inflation to pick up; Africa Economist John Ashbourne says the inflation decline means relief for consumers, but is not a “sign of things to come.” He explains:
“The key force behind weaker inflation was the reduction in core inflation, which we believe was due to the appreciation of the rand. Core inflation slipped from 5.9% y/y in February to 5.4% in March, the slowest rate since February 2014.
Strengthening commodity prices, reduced political risk, and a narrowed trade deficit have caused the rand to appreciate by almost 15% against the US dollar since hitting an all-time low in January. Transport inflation also slipped as a result of moves in global oil prices …
We expect that headline inflation will continue to rise, averaging around 8% over 2016 as a whole. Food and non-alcoholic beverages make up almost 20% of the CPI basket, and have a significant effect on headline inflation. Rising food prices contributed 1.5%-pts to today’s headline figure. We believe that the Reserve Bank will hike rates twice more this year, taking the repo rate from 7.25% to 7.75%. Even so, this is unlikely to do much to limit inflationary pressures, which are mostly being driven by supply side factors.”
