Rate hike still looms despite retail sales dip

Despite a significant dip in real retail sales in South Africa, analysts feel that risks remain for another rate hike on January 31. However, the central bank may also have to ponder that real retail sales could head into negative territory in the months ahead and lead consumers into a recession.

“Even though the news on the inflation front is expected to remain bleak, there are now sufficient reasons to keep monetary policy neutral, but the risks of a further rise remain,” says Nedbank’s economics research team.

The researchers explain that the weak retail sales figures, combined with a decline in vehicle sales, provide further evidence of some moderation in consumer demand as the tighter monetary policy stance takes effect.

Ian Marsberg, senior economist from Absa, says the retail trade sales data shows that consumer spending continues to buckle under the pressure of interest-rate increases, the impact of inflation and stricter credit requirements following the introduction of the National Credit Act (NCA) in 2007.

Chris Hart, chief economist at Investment Solutions, said prior to the retail sales release that South Africa is not a long way from a consumer recession, which follows the vehicle sales recession. He indicated, though, that further interest-rate hikes would do more harm than good, as they would add to the cost pressures in the economy.


According to the data released on Wednesday, retail trade sales at constant (2000) prices for November increased by 0,2% year-on-year compared with October’s revised 1,9% (1,5%) increase.

This is the lowest level in 60 months, with the previous lowest being the 0% recorded in October 2002. The next worst was 0,7% in December 2002, but since then better numbers had been recorded until now.

Retail trade sales at current prices for November 2007 increased by 9,1% compared with November 2006.

Marsberg notes that in recent months the slower growth trend in real retail trade sales gained significant momentum.

“This is largely the result of household budgets coming under pressure from rising food and fuel prices as well as other second-round inflationary pressures. In addition, the introduction of the NCA last year tightened credit requirements, resulting in particularly big-ticket consumer goods taking strain.

“This, together with a 400 basis-point increase in interest rates since June 2006, contributed to sales of interest rate-sensitive items such as furniture, appliances and equipment coming under pressure,” he says.

Marsberg also says that although past interest-rate increases are clearly affecting spending, the full effect of some of the past increases still needs to filter through the economy.

“Consequently, retail trade sales growth is likely to slow down further, with real year-on-year sales growth likely to move into negative territory in the coming months. The latest retail sales data taken together with vehicle sales and manufacturing production data points to a slowdown in economic activity in the fourth quarter of 2007 — a trend that is likely to persist into 2008,” he says.

“However, for an inflation-targeting central bank the risks to inflation of high international oil prices, food inflation, second-round inflationary pressures and the prospects of electricity and other tariff increases are likely to outweigh the slower economic growth.

“Although the end-January monetary policy decision is a difficult one and will still be informed by other data releases, we expect the South African Reserve Bank to hike interest rates by a further 50 basis points at the end of January 2008,” he concludes. — I-Net Bridge

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