There are inflation forecast risks in South Africa and therefore in the dovish central scenario the "tails are quite fat" and these risks should not be dismissed with ease, chief economist of Standard Bank Goolam Ballim told I-Net Bridge in an interview.

"In a long time we have never had such a high degree of volatility and a high degree of forecast risk," he said.

Ballim noted that there is economic and financial market uncertainty around the world and contagion to other advanced economies and then there is also the broadside of Iran and the US — that is, a geopolitical tinge to the oil market.

"Of course, that would be pretty dire, you would imagine, for oil prices from a consumption point of view," he said.

Ballim says that he felt Thursday's inflation report, which heralded an unchanged repo stance, was "dovish" in terms of the way the Monetary Policy Committee read the inflation profile and in terms of the likely probability of the outcomes.

"The nature of your call on prospective rate cuts is going to be subject to the forecast risk that is really enveloping oil and food prices," he said.

"The powerful point that the Governor [of the central bank, Tito Mboweni] made was that if you continue to see prevailing oil prices sustained and there is some degree of stability in the food market, then inflation is likely to unfold with a decelerating bias from the first quarter [of 2009]," he noted.

Forecast risks

"The bottom line is if inflation does unfold the way the market is thinking and the way the Reserve Bank is guided in terms of its forecast, then under those circumstances — which is the kind of mainstream scenario — I have to admit late in the first quarter, early in the second, we will begin to see an easing in monetary policy — but that is exactly that — it is the mainstream scenario," said Ballim.

Why would the Reserve Bank Governor be wrong in his inflation forecast, and by implication where would others in the market be wrong in their interest rate scenario?

"We would be wrong if something happened in terms of global military affairs and if oil prices were to suddenly soar back to $150 a barrel and if, for example, there was perhaps inclement weather in a key food-producing region — Australia or the mid-West of the US — and you have a sustained surge in oil prices, then under those conditions clearly the forecasts that we have got and they alluded to in their statement would be challenged. If the risk were to materialise immediately, then the Reserve Bank may be worried about inflation expectations," concluded Ballim.

I-Net Bridge