South African Recovery May Close Door on Rate Cuts
South Africa will probably report this week that the economy is expanding at its fastest pace in more than a year and that inflation exceeded the target range for a second month, closing the door on interest rate cuts.
Regulators may also announce an increase in electricity prices of as much as 30 percent on Feb. 24, according to economists at Standard Bank Group Ltd. and Old Mutual Investment Group. That could add to pressure on inflation and crimp growth.
“We’re starting to see life in the economy,” said Rian le Roux, chief economist of Old Mutual, South Africa’s biggest private money manager. “Electricity price increases won’t be good for inflation, which is still outside of the target. We’re not going to see any rate cuts.”
Consumer spending in Africa’s biggest economy is picking up after the first recession in 17 years ended and unemployment eased. That may convince Governor Gill Marcus and policy makers that they’ve done enough to revive growth after six rate cuts since December 2008. The monetary policy committee has left the key rate at 7 percent for the past four meetings.
Gross domestic product expanded an annualized 2.6 percent in the fourth quarter, up from 0.9 percent in the previous three months, according to the median estimate of 21 economists surveyed by Bloomberg. The statistics office will report the number at 11:30 a.m. local time tomorrow.
Inflation, which the statistics office will report at 11:30 a.m. on Feb. 24, accelerated to 6.4 percent in January from 6.3 percent the month before, above the 3 percent to 6 percent target, according to the median estimate of 21 economists surveyed by Bloomberg.
Electricity Tariffs
Inflation will climb by a further 0.3 percentage point if the national power utility, Eskom Holdings Ltd., is awarded the 35 percent tariff increase it has requested, according to the South African Chamber of Commerce and Industry.
Marcus left the benchmark interest rate at 7 percent on Jan. 26, concerned that rising electricity prices will fuel inflation. That decision was opposed by some members of the Monetary Policy Committee, who argued for a rate cut, she said at the time.
Marcus said last month the economy will probably expand 2 percent this year, compared with the 2.9 percent forecast by 13 economists in a Bloomberg survey.
Factory output, which accounts for 15 percent of the economy, rose an annual 3.2 percent in December, the first increase in 15 months, the statistics office said on Feb. 11. The economy added 89,000 jobs in the final three months of last year, helping to ease the unemployment rate to 24.3 percent from 24.5 percent in the third quarter.
Union Demands
Woolworths Holdings Ltd.’s Chief Executive Officer Simon Susman said on Feb. 18 that customers of the food and clothing retailer are “in less of a state of shock” and are “feeling better.” Consumers account for two-thirds of spending in the economy.
The Reserve Bank’s leading indicator, which points to economic conditions in six months time, rose an annual 13 percent in December, up from 11 percent in November, the central bank said on its Web site today.
Still, labor unions allied to the ruling African National Congress have called for rate cuts to help accelerate economic growth to provide jobs for the one in four unemployed.
Electricity tariff increases may also damp growth. An increase of 35 percent would cut GDP by 150 billion rand ($19.4 billion) and result in half a million job losses, according to the South African Chamber of Commerce and Industry.
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