Retail sales growth is likely to have slowed in March from an 8% increase in February, backing the case for unchanged interest rates. But the decline won’t be enough to signal a serious slump in consumer demand, analysts say.
“All the evidence so far is that momentum remains — consumer confidence is high and interest rates have been left unchanged,” says Pieter Laubscher of the Bureau for Economic Research. “If there is slower growth it will be very moderate.”
Merrill Lynch economist Carmen Nel sees the annual increase in retail sales down at 7% in March as higher fuel costs and food prices dampen demand, a touch weaker than consensus.
Consumer demand has been the root of faster growth in the economy, but the decision to raise interest rates by a cumulative two percentage points last year is starting to have an impact.
Credit growth has cooled while remaining high, still notching up an annual increase of 24,2% during March.
The central bank policy review tomorrow will carry more weight as markets mull over the inflation outlook — which is improving on the back of a stronger rand — coupled with lower oil and maize prices. “I don’t think they will update their inflation outlook much from the last monetary policy meeting in April,” says Standard Bank economist Elna Moolman.
“There will be a bit more detail behind the forecasts and the tone could be a bit more favourable.”
The Reserve Bank decided at last month’s meeting to keep interest rates steady despite what it described as a “slight deterioration” in the inflation outlook.
It predicted that the annual increase in the consumer price index less mortgage payments (CPIX) would rise near the upper end of its 3%-6% target in the second quarter before declining in the third quarter. Many economists see a breach of the target range between April and June, but believe it will be shortlived, vindicating the Reserve Bank’s decision to keep monetary policy on hold.
“We think interest rates will stay the same because we think the Reserve Bank’s approach is to maximise growth and target the upper end of the inflation range,” Laubscher says. “But there are risks and if any of those go out of balance they will respond.”
Comments by Reserve Bank governor Tito Mboweni on May 4 suggest he wants a weaker rand, saying its appreciation is “out of kilter” with a large deficit on the current account, a country’s broadest measure of trade. That would also mitigate against an interest rate hike, which would boost the “carry trade” appeal of the rand, allowing it to extend its recent gains. The rand breached the key R7/dollar level early in May, and scaled a near nine-month peak of R6,86 last week. Its trade-weighted gains have amounted to nearly 6% since early March, which the Bank will see as more alarming.
Finance Minister Trevor Manuel last week played down the currency’s appreciation, saying it was triggered mainly by dollar weakness and strong commodity prices.
Manufacturing data last week suggested that the stronger currency was starting to take a toll on the sector, as it reduces the competitiveness of SA’s exports. on the other hand, it also puts significant downward pressure on prices, an outcome the monetary authorities will welcome.
Some economists are starting to bet that the next move in interest rates will be down, perhaps before the end of the year.
“We think inflation may still breach the target ceiling to reach 6,1% in April and May, but from June onwards the outlook will be friendly,” Moolman says. “We expect interest rates to remain flat until October, when we see the Reserve Bank cutting interest rates by 25 basis points.”
The Reserve Bank normally moves its repo rate, now at 9%, in increments of half a percentage point, but the small cut would signal a downward phase in the monetary cycle, Moolman says.
She expects further interest rate cuts of 50 basis points each in February and April next year.
Most economists think the central bank will hold interest rates steady until early next year, but there is a growing number who expect the first cut this year.
