· Data just in from the underfunded Statistics South Africa, headline inflation for January rose 4.5% from 4.1% in December, and is 10 basis lower than the 4.6% the market expected
· Core inflation, which excludes food, non-alcoholic beverages, fuel and energy, was at 3.7%.
· The lower core inflation is more indicative of a weak consumer demand given the moderating income growth and a jobs bloodbath, both of which will likely continue in the same directions: income lower and unemployment higher.
· The SARB has room to cut rates but the country risk premium, which remain elevated because we have been loosing fiscal credibility over the years.
· This creates higher interest costs for the state, which crowd out productive or social spending and in turn create the need for higher tax revenues, which comes through administered prices and taxes. These keep inflation higher and constrain the ability of the SARB to cut rates more aggressively.
· The Budget on the 26 of February will be important for Moody’s credit rating outlook and which give us details of the administered price hikes and therefore inflation outlook. Talk about fiscal dominance!
· In the interim, this outcome means very little for the SARB, they take a forward looking approach to monetary policy.