Why short term rate is skewed upside

22 Mar, 2019 - 00:03 0 Views
Why short term  rate is skewed upside

eBusiness Weekly

Taking Stock Kudzanai Sharara
Zimstat published inflation figures for the month of February last week Friday with the numbers showing a slowdown in both month-on-month and year-on-year inflation.

The headline Consumer Price Index stood at an increase of 59,39 percent in February, slightly ahead of the January 2019 rate of 56,90 percent.

The month-on-month inflation rate was 1,67 percent shedding 9,08 percentage points on the January 2019 rate of 10,75 percent.

The year-on-year food and non-alcoholic beverages inflation prone to transitory shocks stood at 69,84 percent while the non-food inflation rate was 54,35 percent.

On the other hand, the month-on-month food and non-alcoholic beverages inflation rate stood at 3,56 percent in February 2019, shedding 3,38 percentage points on the January 2019 rate of 6,94 percent.

The month-on-month non-food inflation rate stood at 0,70 percent, shedding 12,13 percentage points on the January 2019 rate of 12,83 percent.

What slowed inflation down?

According to figures realised by ZimStat, there was a slowdown in food inflation to 3,53 percent in February from 7,02 percent in January.

The price of meat and oil and fats weakened month-on-month to a negative 0,34 percent and a negative 3,64 percent respectively. Also easing were prices of milk, cheese and eggs to an inflation rate of 4,65 percent month on month from 8,94 percent in January. Prices were, however, still higher than those that prevailed prior year comparative.

The inflation rate for beer and tobacco also eased to 4,14 percent and 1,6 percent from 8,74 percent and 25,73 percent respectively. The reverse was, however, true with price having gone up year-on-year.

Gas, which is now prominently used in many households saw prices easing both month-on-month and year-on-year with month-on-month inflation at a negative 5,12 percent from 13,6 percent.

The intervention of Government in the public transport sector also saw inflation on transport service easing to a negative 12,06 percent month-on-month from 59,03 percent, while year-on-year also saw inflation coming off to 59,03 percent from 192,75 percent.

What direction can we expect post MPS?

The inflation report is still a top-tier economic indicator and both treasury, led by Finance and Economic Development Minister Mthuli Ncube and the central bank, led by governor Dr John Mangudya, have spoken quite extensively about it, as we head into the future.

As recent as this week, Minister Ncube said dealing with the inflation pressures is the ministry’s number one concern.

“The inflationary pressures faced have caused uncertainty and pain and we have made this our number one concern,” said Minister Ncube.

“To address this, we have pushed ahead in our efforts to narrow the fiscal deficit and slow down money supply growth and we project inflation to slow down to below 10 percent by the end of the year.”

The rate is in the same region with what Dr Mangudya and his team are forecasting a price growth of 10 percent to 15 percent by year-end.

However, inflationary pressures are likely to persist in the near future and the month-on-month inflation rate of 1,67 percent in February is unlikely to be repeated in March and the few months afterwards.

Three reasons why inflation is skewed upside

A combination of drought and Idai: This year’s farming season was catastrophic. Not much will be harvested and as we head into the next few months, the impact will be felt at the till point. The country will have to resort to imports and relying on food importation and that means that the country would be at the mercy of global prices.

This will have a negative impact on both the fiscus (money supply) and the exchange rate (landing cost). Upward adjustment of prices can thus not be ruled out.

Salary increases: The currently high inflation rates are a result of Government spending beyond means and in the process running a budget deficit.

The plan was to cut on spending this year, but wage pressures have forced Government to offer salary increments that will goggle an additional $300 and $350 million to its employees.

This amount had not been budgeted in the 2019 National Budget and if implemented in April, it will again put pressure on the fiscus with the increased money supply likely to stoke inflationary pressures.

Liberalised exchange rate: The third upside bias comes from the recently liberalised exchange rate. While most businesses and economic players had their prices using the parallel market exchange rates, pressure is likely to come from other service providers whose prices had remained linked to the 1:1 parity.

But with the exchange rate now floated, there will be pressure for price adjustments as is the case with internet and mobile service providers who have asked for a price hike.

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