Finance Minister Pravin Gordhan (left) talks to Reserve Bank governor Lesetja Kganyago during a media briefing after Mr Gordhan was reappointed to the position on Sunday night by President Jacob Zuma, in Pretoria. Picture:  REUTERS/SIPHIWE SIBEKO
Finance Minister Pravin Gordhan (left) talks to Reserve Bank governor Lesetja Kganyago in Pretoria. Picture: REUTERS/SIPHIWE SIBEKO

TWO sets of data out on Wednesday pushed up the odds of the Reserve Bank raising interest rates to tame inflation at its first meeting of the year next week.

Consumer inflation for last month rose to 5.2% compared to a year ago, from 4.8% in November. The acceleration was its quickest in a year due to higher food and household services costs.

Retail sales — an indicator of household spending — increased much more than expected in November as general dealers and retailers in textiles, clothing, footwear and leather goods showed resilient sales.

Rising inflation and the deterioration in the inflation outlook due to rand weakness support rate hikes, but better retail sales suggest consumers can still handle more hikes. Although consumer spending and confidence has been slowing, the higher retail sales show they have not collapsed and the spending can still support growth.

The Bank raised rates twice last year by 50 basis points.

Nedbank economist Johannes Khosa said the Bank was likely to lift interest rates by 50 basis points. The bank forecasts three more interest rate hikes of 25 basis points each in March, May and July.

Although the Reserve Bank bases its decisions more on the inflation outlook than on past inflation numbers, such data are still important as they show the inflation trend. Inflation has been increasing since the beginning of last year and is forecast to accelerate as the rand tanks.

The sacking of former finance minister Nhlanhla Nene, lower Chinese economic growth and a rise in US interest rates all pushed the rand to records above the R15/$ level in the past month.

If Finance Minister Pravin Gordhan announced a cut in government spending and no further tax increases in his budget next month, that would help reduce the rand’s depreciation, Investec chief economist Annabel Bishop said.

The market feared further credit downgrades for SA in the absence of such an announcement in the budget, she added.

Bank governor Lesetja Kganyago said on Wednesday on the sidelines of the World Economic Forum in Davos that the bank was facing a policy dilemma.

"What you can’t take away is that SA is facing a policy dilemma from a monetary policy perspective. We are having slowing growth and rising inflation. It is not something that we didn’t expect," he said.

With Bloomberg