Growth, inflation data give conflicting cues
May 26, 2009
By Ethel Hazelhurst
Economic data are providing confusing signals to the Reserve Bank's monetary policy committee (MPC), which starts its two-day meeting tomorrow. The bank has cut its repo rate by 3.5 percentage points since December, to 8.5 percent - after a hike of 5 percentage points between June 2006 and June 2008.
The argument for a further cut will be supported by data due today from Statistics SA, which will show gross domestic product (GDP) shrank in the first quarter, after contracting an annualised 1.8 percent in the previous quarter.
A second contraction will confirm the economy is in recession. Colen Garrow, an economist at Brait, said large contractions in manufacturing, mining and retail sales - which together make up 35 percent of GDP - "can be expected to tip the economy into recession".
Even the construction sector, which had kept economic momentum going, was starting to falter, he warned. Residential building plans passed slowed by 50.3 percent in the first quarter, Stats SA data showed.
But at the same time rising oil prices signal inflationary pressures: Brent crude traded above $60 a barrel yesterday, up from below $40 at the start of the year. The impact could be softened by a stronger rand. A dollar fetched R8.2755 yesterday against R10.60 in February. But rising oil prices fuel global inflation, which affects prices of all imported goods.
Consumer inflation data due tomorrow from Stats SA may show food continues to boost consumer price index (CPI) growth, which has been above the Reserve Bank's 6 percent target ceiling since March 2007. It was at 8.5 percent in March.
These inflationary pressures could persuade the MPC to hold the repo rate steady, at least until next month.
But all 25 economists polled by Reuters believe the central bank will cut the repo rate this week: 16 expect a full percentage point cut and nine foresee a half percentage point slice.
Figures that should support the case for a rate cut include the producer price index from Stats SA on Thursday. Producer inflation has subsided to 5.3 percent in March from 19.1 percent last August and is expected to slow further. Nedbank Capital said: "Domestic wheat and maize prices are down 34.4 percent year on year and 11.1 percent, respectively."
On Friday credit extension figures from the Reserve Bank will also support rate cuts. Growth in credit to the private sector fell to 8.5 percent last month, down from a peak of 27.5 percent in October 2006.
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