The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

MIXED economic figures published this week reinforced the view that interest rates are likely to stay unchanged next year and probably until late in 2014.

Dismal year-on-year retail sales growth of 1% in October, a 7.7% fall in mining production and lower-than-expected inflation last month may support the argument for a rate cut at next month's meeting of the Reserve Bank's monetary policy committee (MPC). However, a rebound in manufacturing production and higher inflation expectations balance the view on interest rates.

Retailing disappointed due to weak sales by general dealers, textile and clothing and food and beverages. Investec economist Annabel Bishop said retail sales were hit in October with mining strikers going unpaid.

This resulted in more use of savings and credit in September. By October many households were battling, which probably prompted the return to work, Bishop said.

Despite better-than-expected growth in manufacturing output, the effects of strikes also showed in manufacturing and mining data.

Manufacturing production rose 2.5% year on year in October after falling 1.7% in September. The basic-metal products and machinery manufacturing category shrank 2.5%, compared with 2.7% in September.

Ilke van Zyl, economist at Absa Capital, said users of raw mining materials for production were also hit by the August-October mine strikes. Machinery suppliers suffered the most in September. Beneficiaries of mining products were most adversely affected in October.

The main factor in the mining output fall was a 45.7% fall in gold production as strikes spread to mines like Gold Fields in October.

Nedbank's group economic unit said the Reserve Bank could do little about operating problems in mining so lower mining production would have limited influence on monetary policy.

Economic growth prospects remain a concern. The Reserve Bank's latest forecast for economic growth is 2.5% this year and 2.9% next year. A year ago, the bank still expected growth rates of 3.2% and 4.2% respectively.

However, inflation is expected to edge up.

Stats SA said this week that consumer price index (CPI) inflation stayed at 5.6% last month and producer price index (PPI) inflation was lower than expected at 5.2%. But analysts warn that higher food and energy prices are likely to push CPI inflation close to or above the 6% upper end of the bank's inflation target.

And the rand exchange rate presents a material inflation risk.

The Reserve Bank expects CPI to peak at 5.7% in next year's first quarter and average 5.5% for the year, but this is one of the more optimistic inflation views.

The latest inflation expectations survey of the Bureau for Economic Research forecasts average inflation of 6.1% next year and 6.2% in 2014.

Elna Moolman, economist at Renaissance Capital, expects average inflation next year to be below 6%, perhaps with occasional breaches of the ceiling.

"Our forecast for core inflation in the medium term is slightly higher than the very benign outlook of the Reserve Bank, but we would agree that is should remain reasonably contained," she said in a report.

"We expect inflation to be too high to create scope for further monetary easing, despite the weak economic growth outlook; while it is unlikely to be high enough on a sustained basis to force the bank to hike interest rates, given the bleak growth prognosis."

Bishop said CPI inflation is likely to exceed 6% next year and should peak close to 6.5% if there are no moderating influences like petrol price cuts. She said the reweighting of the CPI basket from January means the 16% hike in electricity price that Eskom has applied for will add to the CPI.

Nedbank said food would continue to put pressure on inflation in coming months.

* This article was first published in Sunday Times: Business Times