/ 14 August 2008

Attention turns to interest-rate decision

The South African Reserve Bank is expected to leave interest rates unchanged at the end of a two-day policy meeting on Thursday on an improved outlook for inflation and concerns about cooling consumer spending.

Nineteen of 26 economists polled by Reuters last week saw the central bank’s monetary policy committee (MPC) leaving the key repo rate steady at 12%. Only seven expected another 50 basis-point increase.

Central bank Governor Tito Mboweni will announce the decision shortly after 3pm.

The central bank has lifted the rate 10 times since June 2006 — raising it by 50 basis points each time — to try to bring inflation down.

But inflation keeps accelerating, driven largely by food and energy costs, in contrast to consumer spending, which is under severe strain.

The targeted CPIX (consumer inflation less mortgage costs) consumer price gauge hit a record 11,6% year-on-year in June and economists expect it to peak over the next few months after a sharp jump in electricity costs filters through.

The outlook, however, is brighter, with fuel costs likely to fall for the second month in a row in September and a re-weighting of the price basket in 2009 expected to bring inflation down.

Retail sales, released on Wednesday, clearly showed the pressure the past rates hikes are having on households.

”Retail sales fell in May, they fell in June, and the outlook for the second half is very weak,” Jeff Gable, head of research at Absa Capital, said.

”For a reserve bank that is probably disinclined to raise interest rates, this gives them more fodder to keep rates on hold.”

Statistics South Africa said retail sales contracted by 2,6% year-on-year at constant prices in June from a 3,4% fall the previous month.

New vehicle sales and housing prices are also falling as households nurse dwindling budgets.

There is also political pressure not to raise rates again.

The Congress of South African Trade Unions, a key ally of the ruling African National Congress, has demanded looser monetary policy, threatening strikes should the bank’s actions heap more pressure on the debt-laden poor.

But the decision is not clear-cut.

A weaker rand — the currency has lost about 10% of its value over the past week, largely due to a dollar rally — could worsen the outlook for inflation, and the MPC may also want to clamp down on rising pay demands.

Some analysts warn that not raising rates while inflation is so far outside the 3% to 6% target range may damage the bank’s credibility for trying to curb inflation. — Reuters