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South Africa: Markets Look to Bank's Review
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Business Day (Johannesburg)
12 May 2008
Posted to the web 12 May 2008
Mariam Isa
Johannesburg
LOCAL markets will take their cue from a Reserve Bank report this week, which may shed light on how much further interest rates will rise this year, and the extent to which the inflation outlook has deteriorated.
The Bank's twice-yearly monetary policy review is likely to reinforce its stern response to a relentless global rise in price pressures, which may prompt it to hike lending rates by another full percentage point in the next few months.
Its release tomorrow will be followed by official retail sales data for March on Wednesday, which are expected to show a fall in growth as surging debt costs and inflation erode the spending power of consumers.
"We are looking for anything to confirm that the Reserve Bank will put rates up again at its policy meeting in June," says Brait economist Colen Garrow.
"It's all about inflation. It's a question of how much interest rates are going to go up and how long will this go on ... at a time when the economy has clearly stalled," he says.
The Bank has lifted its key repo rate by 4,5 percentage points to 11,5% since June 2006 in a bid to check inflation, which has continued to climb.
But it has helped curb rapid growth in the economy, which according to a recent Reuters poll is set to slow to 3,6% this year from 5,1% last year.
News that the annual rise in CPIX quickened to 10,1% in March -- a five-year peak -- was followed by data showing that factory prices accelerated to 11,8% during the same month.
The double whammy prompted governor Tito Mboweni to warn last month that the Bank may not wait until its scheduled June 11-12 policy meeting to raise interest rates.
The situation was "deteriorating", he said in an interview with state broadcaster SABC. Few now believe the Bank will hold an emergency policy meeting but the remarks fanned talk that rates could rise as much as 150 basis points this year.
"We expect the overall tone of the (review) to be hawkish, highlighting upside risks to inflation due to high oil and food prices as well as pressure from second-round effects," says JPMorgan analyst Tebogo Dintwe.
Inflation measured by CPIX has breached its 3%-6% official target range for a full year, and is expected to exceed its record of 11,3% reached late in 2002.
Dintwe says the Bank is likely to revise its forecasts for inflation upwards again at its June policy meeting, as wages rise and electricity tariffs surge. "We expect the Bank to increase interest rates by 100 basis points over the next three months," she says.
At its policy meeting last month, the Bank predicted inflation would peak at an average 9,3% in the first quarter of this year, returning to its target range late next year.
Some analysts think CPIX will remain above the upper limit of its target until 2010, while others predict a peak of 15% this year.
Much depends on the response of the National Energy Regulator of SA (Nersa) to a request by power utility Eskom to double its tariffs over the next 18 months, given the soaring cost of its expansion plan.
Nersa's decision is due a week ahead of next month's meeting of the Bank's monetary policy committee.
Even if the entire hike is not granted, the previously agreed 14% rise is likely to be substantially increased.
Today's retail sales data from Statistics SA will provide a sobering reminder of the toll that rising interest rates are taking on the economy.
"Growth in retail sales is expected to decline in March, perhaps even into negative territory," says Standard Bank .
"It is clear retailers will face a tough few quarters before conditions improve, and a significant improvement is likely to happen only in 2010."
Retail sales, which account for 14% of the economy, fell in the final two months of last year but staged a modest recovery early this year.
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In February growth picked up to 2,5% compared with the same month last year.
Investec economist Annabel Bishop has predicted an annual fall of 2,9%, due partly to the timing of Easter holidays, which fell in March.
There is likely to have been an improvement in April, but the economy's third-biggest sector will remain sluggish until 2010, when rates start falling.
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