CPI, retail sales data dim rate cut hopes

CPI, retail sales data dim rate cut hopes

2011-10-19 16:30

Johannesburg - South Africa’s consumer spending recovery picked up pace in August and inflation quickened slightly more than expected in September, lessening the chance of an interest rate cut that some analysts have been calling for.
The Reserve Bank has left interest rates unchanged at 30-year lows this year, after cutting by 650 basis points in the two years to the end of 2010.

With the economic recovery losing momentum in the second quarter, some market players have said further monetary policy loosening could not be ruled out.
Rates on forward rate agreements suggest the market is still pricing in a risk (20%-30%) of a cut early next year, with the rate on the 5x8 contract at 5.3% compared with a repo rate of 5.5%.
But the market may be running ahead of itself, some analysts say.

“Despite today’s higher-than-expected CPI and retail sales prints, we maintain our view that interest rates are likely to be kept on hold for longer in South Africa,” said Absa Capital in a note.

Data on Wednesday showed September’s annual inflation quickened more than expected to 5.7% and retail sales also beat forecast, rising 7.1% year-on-year in August.

Consumer spending - a previous driver of economic growth - had been weak thanks to high household debt levels and over a million job losses since the recession in 2009. Data over the next few months will confirm whether household expenditure has bottomed out.

Caution to prevail

The Reserve Bank is worried about demand in the economy, with Deputy Governor Daniel Mminele saying in a speech on Tuesday demand was too subdued to worsen inflation pressures, which are mainly stemming from food and fuel costs.

Mminele’s comments suggest the central bank is inclined to keep its wait-and-see approach until data is pointing to a decisive improvement in economic conditions.

For now, data has been patchy, with the demand side of the economy still struggling. After the release of higher-than expected manufacturing production numbers last week, Finance Minister Pravin Gordhan said he would rather wait to see a trend before being convinced.

As such, while the risk of another rate cut has eased somewhat, it’s not completely out the window.
“Notwithstanding today’s positive retail sales data, we expect the repo rate to remain on hold at 5.5% this year with monetary policy normalisation likely to be initiated in the third quarter of 2012,” said Standard Bank in a note.

“We do not rule out the possibility of further policy easing by the Sarb, should the deterioration in global economic activity intensify,” the bank added.

  • Kevin - 2011-10-20 09:55

    Rates must go up . just as many people burn when interest rates are low. Why worry about those who over commit?

  • Jean-Paul - 2011-11-17 16:42

    cause 80% of us did overcomit , so if you raise now ,you killing the economy and say hello Zimbabwe

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