Tuesday, April 28, 2009

SA holds its breath for decision on rates

April 28, 2009 / By Ethel Hazelhurst

The week ahead will bring a raft of economic data and probably a rate cut. On Thursday, the Reserve Bank monetary policy committee (MPC) will announce whether to make a further cut in its official repo rate - currently at 9.5 percent.

After a 5 percentage point hike between June 2006 and June last year, the bank started cutting the repo rate from its peak of 12 percent in December.

As the MPC starts its two-day meeting on Wednesday, Statistics SA will release inflation figures for last month that will indicate how long it will take before inflation falls back within the bank's target range of between 3 percent and 6 percent.

Consumer price inflation, which has been above the target ceiling since March 2007, peaked at 13.4 percent in August. Its downward trend to 8.1 percent in January was halted when it rose to 8.6 percent in February.

Inflation will be buoyed by higher electricity prices. Nedbank Capital said Eskom planned to spend R385 billion on new power plants over the next five years. As it was "increasingly difficult and costly to raise capital internationally", the funding would have to come out of higher electricity tariffs.

Nedbank economist Carmen Altenkirch said the March figure would be affected by the results from a number of surveys, including owner's equivalent rent, rent, domestic worker wages and public transport.

Altenkirch said: "Fuel prices rose again in March, which will add to the month-on-month increase."

As a result, "inflation could surprise on the upside", she said, adding that the longer-term outlook for inflation would be affected by services inflation.

When a new consumer basket was introduced in January, the weighting of services was raised from 40.58 percent to 45.8 percent.

Services respond slowly to demand changes, so prices are likely to stay higher for longer, despite a fall in demand.

Thursday will bring the release of three sets of crucial data for March: Stats SA will provide figures on producer price inflation, the Reserve Bank will publish figures on credit extension and Sars will release trade data.

Producer inflation has fallen consistently, from a peak of 19.1 percent in August to 9.2 percent in January and 7.3 percent in February.

The slide has been driven by falling commodity prices, especially oil, which has fallen from $47 (R412) a barrel last July to between $40 and $50 this year. Although the price of petrol at the pump rose 45c to R7.07 in Gauteng last month, the price was still lower than the R8.25 of March last year.

In February, credit to the private sector rose just more than 11 percent year on year, from 11.9 percent in January and a peak of 27.5 percent in October 2006. The growth rate is likely to continue to fall as consumers remain cautious about taking on new debt.

The trade deficit in February fell to R500 000, after a R17.3 billion deficit in January. This week's data will give more direction about the likely outcome for the year. Trade account performance is vital to South Africa, because flows on the services account are always negative.

The two accounts combined make up the current account, which reflected a deficit of 5.8 percent of gross domestic product in the fourth quarter, from 7.8 percent in the third.