Mariam Isa
17 September 2007
Johannesburg — DELAYED retail sales figures due this week are set to confirm a slowdown in consumer spending but the Reserve Bank is unlikely to dispel speculation of another rate hike in a report on Thursday.
Markets are betting that the chances of higher interest rates have receded after data last week gave more evidence that economic growth is subsiding.
But analysts say hawkish comments on inflation from the Bank mean a further increase in the lending rate at its October policy meeting is possible.
Its annual economic report, due on Thursday, is likely to keep markets guessing, after the Bank revealed that inflation will be "comfortably" inside its target range only by the second half of next year.
That differed from remarks last month that the annual increase in CPIX will be back within its 3%-6% target range by the second quarter of next year.
Bank officials say its inflation forecast has not changed and this is only a question of semantics -- the initial dip below 6% would not last the whole quarter.
Standard Bank economist Danelee van Dyk says: "I'm starting to wonder whether they are not increasing their vigilance with regards to inflation -- it shows some level of uncertainty on their side."
She sees inflation peaking at 6,9% early next year -- something that would worry the Bank, even though the main factors driving prices higher are food and fuel, which are beyond its control.
"I don't think the Bank wants anyone to get the impression 'This is it (in interest rates), you can now go for it'," Investment Solutions economist Chris Hart said.
"They are not going to spell things out and even in the five short weeks to the next meeting there are lots of pitfalls," he said.
Local money markets are now pricing in a 60% chance that interest rates will rise by another half a percentage point in October, down from 80% two weeks ago.
Yields on benchmark government bonds, which move inversely to prices, have also fallen by up to 12 basis points as rate hike fever cooled.
The main reason for the change in sentiment is the trends unveiled in the Bank's quarterly bulletin last week. This showed that overall spending rose by an annualised rate of 1% in the second quarter of this year -- a 4½ year low.
Consumer spending also subsided, but not as sharply, while household debt as a ratio of disposable income rose more slowly than in previous quarters. Consumer demand is the main engine of growth, accounting for 60% of gross domestic product, while robust credit demand has also fanned inflation.
"It's a delicate balance still. Data last week have shown the economy is slowing but we still have broad-based pressure in the inflation framework, which is the Bank's focus," said Van Dyk.
Analysts believe that figures due from Statistics SA on Thursday will send a benign message, showing retail sales slowed in July.
The annual rise in the key measure of consumer spending dipped to 6,4% in June from 9,2% in May. But Stats SA has delayed the July release because of a low survey response rate, and has warned of "significant revisions" to data for April to June.
Analysts say, given a slowdown in VAT receipts, the figures are likely to be revised downwards, easing the pressure for higher interest rates.
"My suspicion is they will reflect lower sales... fairly supportive of the case for not raising rates," said Hart.
Demand for durable goods -- generally the most sensitive to interest rates -- has fallen sharply in the past few months.
The Bank's quarterly bulletin shows spending on this category of goods fell by an annualised rate of 10% in the second quarter. Stats SA says sales of furniture, appliances and equipment fell 13,5% in the year to June.
"The retail trade data should shed more light on the extent to which consumers are slowing their spending," says Efficient Research economist Nico Kelder.
"Should the slowdown be significant enough, the Bank might leave rates on hold ."
It takes up to two years for changes in interest rates to be fully felt and previous rate hikes are still working through the economy.
The Bank has raised its key repo rate by three percentage points to 10% since June last year.
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