Flash Comment - South Africa: Inflation in April eased further

South African inflation eased further in April to 4.8% y/y, down from 5.1% y/y in March and was somewhat lower than expected.

Details

South African headline inflation came in somewhat lower than expected at 4.8% y/y in April, down from 5.1% in March, and was lower than our forecast and the consensus expectation of 5.1% y/y. On monthly basis, prices increased by 0.2% between March and April, which was also somewhat lower than expected.

Assessment & Outlook

We expect inflation to stabilise around the current level and stay comfortably within the South African central bank’s inflation target range of 3-6% for most of this year. The inflation outlook remains fairly balanced with the main upside risk coming from administered prices. We forecast South African inflation at 4.9% y/y in both 2010 and 2011. When looking at the growth picture, Q1 GDP figures published yesterday confirmed a continued recovery in the South African economy. Furthermore, the breakdown of the GDP figure showed a fairly broad-based recovery with all sectorscontributing positively to the growth. Even the trade sectors were positive, indicating that the demand side of the economy might also be starting to recover. However, it should be noted that Q1 GDP growth was to some extent supported by World Cup preparations and one should question whether the growth momentum will be sustained in subsequent quarters when the effect from the World Cup wanes. Furthermore, uncertainty about the South African growth outlook stems from a possible economic downturn in Europe – one of South Africa’s largest trading partners – on the back of the debt crisis in Europe. Nonetheless, for now, as private consumption continues to recover, we expect average GDP growth this year of 2.5% y/y and 3.5% y/y next year.

In terms of monetary policy, we believe that monetary easing is over. Despite inflation continuing to surprise on the downside, we believe the South African central bank will opt for a cautious stance and refrain from further monetary easing given the continued deterioration of the condition in the financial markets on the back of the debt crisis in Europe (which has a significant effect on South African markets). Hence, we expect the SARB to keep interest rates on hold for a prolonged period of time.