Release of manufacturing production data should shed light on growth outlook

THE Reserve Bank's monetary policy committee will meet on Wednesday for the third time this year to decide on whether to ease interest rates.

The committee's decision, which will be made on Thursday, will dominate an otherwise quiet week on the markets, in which only manufacturing production data will be of some interest.

Most analysts believe the committee will reduce the Bank's repo rate by one percentage point to 11%, bringing prime interest rates down to 14,5%, as evidence that consumer inflation was decelerating sharply.

In June, the Bank's targeted inflation measure, CPIX (consumer inflation less mortgages) slowed to 6,4% year on year from 7,7% in May, while the headline inflation rate came in at 6,7%.

CPIX is now hovering above the 6% upper limit of the inflation target and according to governor Tito Mboweni, it should fall within the target range by this quarter.

He painted a fairly upbeat picture of the inflation outlook in a speech to businessmen last week, boosting the prospects of a rate cut on Thursday.

Lifting the inflation outlook were low producer prices, weak global growth and inflation, low money supply growth and the strengthening of the rand, said Mboweni.

However, he warned that high unit labour costs were still a "major threat" to the inflation target, which should caution the market against expecting another aggressive interest rate cut.

Mboweni said that wages continued to be set in a retrospective manner, and given the drop-off in productivity, were constraining any slowdown in inflation.

Although not market-moving, the release of second quarter manufacturing and mining production data tomorrow will give some indication of growth prospects for the rest of the year.

Manufacturing contributes 18% to gross domestic product and is the largest employer in the economy.

Manufacturing production volumes fell 4% year on year in May, and growth is likely to have remained weak in June, as export sectors continue to struggle in the face of declining world demand and the stronger rand.

However, the latest purchasing managers index, compiled by the University of Stellenbosch's Bureau of Economic Research and sponsored by Investec Asset Management, increased sharply last month, reflecting a possible bottoming out of the recession in the manufacturing sector.

Lower inflation, declining interest rates and steady retail demand have boosted confidence in the manufacturing sector, with new sales orders, inventories and employment improving last month, according to the index.

However, Standard Bank said it was "still too early to call an end to the tough times (in the sector) as the international economy continues to stagnate".

Local markets will take direction from the US markets, where a raft of economic data, such as retail sales, trade balance and inflation, are expected this week.

The data will be closely watched to see whether they confirm tentative signs that the US economy was in a recovery phase.

Standard Bank predicts a rise in US retail sales last month to 0,7% month on month, reflecting improved consumer confidence, lower inflation and expected tax cuts.