Hope for growth, interest rates

Analysts said Thursday's data, including a report showing the annual growth rate of manufacturing output accelerated to 6.1% in June from 1.1% in May, would not change the likely outcome of the central bank's August 13 to 14 meeting.

An end to a two-year cycle of rate rises, as forecast by a Reuters poll, will help placate trade unions, which this week brought the economy to a halt with a one-day strike to protest high electricity prices and interest rates.

"Although the data has surprised on the upside, it is unlikely to be viewed by the SARB (central bank) as an indication of overall resilience in economic activity," ABSA Capital said in a research note.

"We remain of the view that a combination of weak economic activity and an improved inflation outlook will see the SARB leave rates on hold (at 12%) at the MPC meeting next week."

The pick up in manufacturing growth pointed to stronger economic activity in the second quarter after growth in Africa's biggest economy slowed to a 6-and-a-half year low of 2.1% in the first quarter of 2008.

Manufacturing is South Africa's second biggest sector, making up 17% of GDP.

"Obviously there's something of a boost to GDP ... I'm looking at a rebound in GDP in the second quarter," Citigroup economist Jean-Francois Mercier said.

Still, analysts' optimism was tempered as the strength of the rise in manufacturing output was partly due to comparison with a low base in June 2007, when many refineries were shut for maintenance.

Be patient

There are clear signs that the economy is under pressure from previous interest rate hikes, with new vehicle and retail sales falling year-on-year and house pricing down.

But prospects may gradually be improving if improvements in economic and business confidence in July are anything to go by.

The South African Chamber of Commerce and Industry's BCI edged up from June's 4-and-a-half year low, while the Reuters Econometer increased for the second straight month, climbing away from recent 5-and-a-half-year lows on an improved outlook for inflation.

The Econometer poll showed targeted CPIX inflation easing sharply to average 7.51% in 2009 from 11.33% this year, helped by a re-weighting of the price basket next year.

This should back the case for no further increase in rates, despite CPIX hitting a record 11.6% year-on-year in June, a level that is well outside the 3 to 6 percent target band.

"The consumption indicators are well on their way down and we should step back and wait for them to catch up," Brait Merchant Bank economist Colen Garrow said. "We must be patient."

The central bank has raised the repo rate 10 times - by 50 basis points each time - to 12% since June 2006 to try to rein in inflation and all but one economist polled by Reuters predicted the next move in rates will be cut, probably in 2009.

Looser monetary policy would please the central bank's critics in the ANC and in unions.

However, Mboweni has vehemently dismissed their demands and has vowed not to be influenced by political pressure.

- Reuters