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Johannesburg - South African spending growth quickened and demand for imports contributed to a wider current account deficit in the first quarter, suggesting recovery is taking hold and backing the case for higher interest rates.
The central bank has left interest rates steady at 30-year lows this year, waiting for signs of broad-based economic recovery rather than risk strangling demand with a hike.
Consensus is that the next adjustment will be upwards but the market is divided on whether policy tightening will start in the fourth quarter of this year or the first quarter of 2012, to normalise rates that fell by 650 basis points in the two years to December 2010.
Reserve Bank data on Tuesday showed the recovery in expenditure picked up pace in the first quarter, with domestic spending increasing to 8.3% from 2.4% in the fourth quarter of last year.
“We think there’s a chance for at least one interest rate rise this year,” said Salomi Odendaal, economist at Citadel. “It’s obvious that in the first quarter the economic recovery continued to gain momentum and we saw that with household spending that was quite strong.”
Appetite for imports contributed to a widening of the current account deficit, which swelled slightly more than expected to 3.1% of gross domestic product (GDP), from a revised 1.0% in the fourth quarter.
Higher rates
Reserve Bank chief economist Monde Mnyande said on Tuesday the bank would not raise rates on rising oil and food prices alone.
Higher commodity prices, along with administered prices, have been the main upside risk to inflation and are expected to be the main factors pushing CPI above its 3% to 6% target band, to peak at 6.3% in the first quarter of 2012.
“The cost push pressures are the ones that have made the MPC (Monetary Policy Committee) not to move up on policy rates. We take into consideration all other prices in the basket and it wouldn’t be fair to look at one variable - that’s not how we do things,” Mnyande told a breakfast meeting earlier.
“We will consider all factors that affect inflation.”
One of those factors will be how fast higher wage settlements feed through to demand and inflation, analysts said.
Workers have demanded double digit wage increases - as much as 20% in some mining companies - setting the tone for settlements that are way above the current inflation rate of 4.2%.
Such high expectations contributed to a slight rise in consumer confidence in the second quarter, which rose to 11 from 9 in the first quarter.
But even then, high levels of debt and weak credit demand will still constrain the rise in household demand over the next few months. In anticipation of rate increases, consumers are more likely to repay debt than spend their disposable income.
“The data doesn’t change our view that interest rates will start rising only in January next year,” said Isaac Matshego, economist at Nedbank.
“We expect a bit of a reversal in the first quarter after that strong growth of 4.8% we saw in Q1. The global economy is still very uncertain and risks have increased,” he said, adding the domestic economy could not withstand a hike in rates this year.
The central bank has left interest rates steady at 30-year lows this year, waiting for signs of broad-based economic recovery rather than risk strangling demand with a hike.
Consensus is that the next adjustment will be upwards but the market is divided on whether policy tightening will start in the fourth quarter of this year or the first quarter of 2012, to normalise rates that fell by 650 basis points in the two years to December 2010.
Reserve Bank data on Tuesday showed the recovery in expenditure picked up pace in the first quarter, with domestic spending increasing to 8.3% from 2.4% in the fourth quarter of last year.
“We think there’s a chance for at least one interest rate rise this year,” said Salomi Odendaal, economist at Citadel. “It’s obvious that in the first quarter the economic recovery continued to gain momentum and we saw that with household spending that was quite strong.”
Appetite for imports contributed to a widening of the current account deficit, which swelled slightly more than expected to 3.1% of gross domestic product (GDP), from a revised 1.0% in the fourth quarter.
Higher rates
Reserve Bank chief economist Monde Mnyande said on Tuesday the bank would not raise rates on rising oil and food prices alone.
Higher commodity prices, along with administered prices, have been the main upside risk to inflation and are expected to be the main factors pushing CPI above its 3% to 6% target band, to peak at 6.3% in the first quarter of 2012.
“The cost push pressures are the ones that have made the MPC (Monetary Policy Committee) not to move up on policy rates. We take into consideration all other prices in the basket and it wouldn’t be fair to look at one variable - that’s not how we do things,” Mnyande told a breakfast meeting earlier.
“We will consider all factors that affect inflation.”
One of those factors will be how fast higher wage settlements feed through to demand and inflation, analysts said.
Workers have demanded double digit wage increases - as much as 20% in some mining companies - setting the tone for settlements that are way above the current inflation rate of 4.2%.
Such high expectations contributed to a slight rise in consumer confidence in the second quarter, which rose to 11 from 9 in the first quarter.
But even then, high levels of debt and weak credit demand will still constrain the rise in household demand over the next few months. In anticipation of rate increases, consumers are more likely to repay debt than spend their disposable income.
“The data doesn’t change our view that interest rates will start rising only in January next year,” said Isaac Matshego, economist at Nedbank.
“We expect a bit of a reversal in the first quarter after that strong growth of 4.8% we saw in Q1. The global economy is still very uncertain and risks have increased,” he said, adding the domestic economy could not withstand a hike in rates this year.
