Johannesburg - Annual growth in South Africa’s retail sales
was flat in May and inflation quickened more than expected in June,
highlighting the dilemma the Reserve Bank is facing in containing inflation
without hurting an already-weak recovery.
The South African Reserve Bank (Sarb) is largely expected to leave the repo rate
unchanged at 5.5% on Thursday, when the focus will be on any clues policymakers
give about when rates will start rising from 30-year lows after 650 basis points'
worth of reductions between December 2008 to the end of 2010.
So far, the market is divided on the timing of the monetary
tightening cycle, with 12 out of 21 analyst polled by Reuters last week seeing
interest rates starting to rise before year-end.
The central bank has previously said it will be vigilant on
any signs of inflation risks emanating from demand and will not hesitate to
tighten policy.
But it is loath to tighten monetary policy just on food
and fuel prices alone, which have been the main drivers of inflation that have
helped to raise it from five-year lows in September last year.
Statistics South Africa on Wednesday said retail sales
growth was flat on an annual basis in May while inflation rose to a 15-month
high of 5.0% year-on-year in June, mainly due to food and fuel prices.
Government bonds extended gains after the retail sales data
as the market moved to position for sideways movement in rates this year.
The forward rate agreements have also pointed to softening
rate rise expectations, with the rate on the 4x7 contract falling to 5.67
Wednesday from 5.84 in mid-June.
“I was expecting Q4, but I think Q1 is when a hike is going
to happen,” said Colen Garrow, an economist at Brait, changing his rates view
after the retail sales data.
Weak recovery
Retail sales were the main driver of growth before the
recession in 2009. The recovery has been anaemic and the economy is expected to
grow by 3.4% this year, a fraction of the 7% the government has said is needed
to reduce unemployment from 25% of the labour force.
The government last year expanded the Reserve Bank’s
mandate, asking it to also consider growth and employment in its monetary
policy decisions.
More than a million people have lost jobs since the
recession and with those that are unemployed hesitant to spend, the Reserve
Bank might be reluctant to tighten monetary policy too soon.
The manufacturing sector, the second-largest contributor to
gross domestic product (GDP) has also been sluggish with a bleak outlook, given the global economic
slowdown.
“Latest statistics on local and international growth have
not been encouraging and we would therefore still expect the Reserve Bank ...
to delay its first hike until early 2012, as an early interest rate increase
would risk curbing the economic recovery,” said Nedbank in a note.
Inflation rise
The rise in inflation might not be that much of a surprise
to the Reserve Bank that sees inflation breaking outside its 3 to 6% target to
peak at 6.3% in the first quarter of 2012.
Administered prices, such as electricity prices and
municipal rates, are likely to add to inflationary pressures over the next few
months.
“Core inflation increased by 3.5% y/y (year-on-year) from 3.2%, indicating
that demand-driven inflation is starting to rise,” said Investec in a note,
calling for a rate increase in the fourth quarter of this year.
“The Sarb will monitor it closely to gauge underlying demand
push inflationary pressures,” the company said; it could change its view after
the rate decision on Thursday.
The Reserve Bank will likely warn on double-digit wage
demands, which have led to strikes at some companies in the mining and chemical
industries.