Kevin O'Grady

Economics Editor

RETAIL sales rocketed towards a five-year high in December, as consumers splashed out R30bn in a relentless spending spree brought about by benign inflation and low interest rates.

The final retail sales numbers for 2004 reinforce its image as the year of the consumer, with domestic demand coming to the rescue of an economy battling against the strong rand.

But the figures do not bode well for further cuts in interest rates. Coming a day after the Reserve Bank reported very strong growth in consumer demand for credit, yesterday’s data caused optimism for a rate cut at next month’s meeting of the Bank’s monetary policy committee to dwindle even further.

"The case to leave monetary policy on hold at the next (committee) meeting becomes more convincing," said Brait economist Colen Garrow.

The committee watches consumer demand closely because of its potentially inflationary effects. Together with higher oil prices, last week’s expansionary budget and a widening trade deficit, most economists believe unabated consumer spending will demand a cautious monetary response from the Bank.

Retail sales — the main indicator of consumer demand — rose 12,3% year on year in December, from 11,1% in November, as consumers splurged a massive R30bn at constant 2000 prices. On a monthly basis, sales in December surged 31,7%. Retail sales grew 10,3% overall last year, compared with 4,9% in 2003.

The figures might be bad news for those hoping for another rate cut soon, but they are good news for investors in the retail sector, confirming suggestions of a bumper Christmas shopping season. They are also good for economic growth, with consumer spending one of the main drivers of the fastest growth last year since 2000.

The data gave the bond market a jolt, as traders digested the likely negative implications for a rate cut. Lower interest rates enhance the appeal of fixed- income products such as bonds.

Bonds were also affected yesterday by the weaker rand, which moved above R5,90 to the dollar, as well as a sell-off in emerging market bonds globally. The yield on the key six-year R153 government bond ended at 7,60%, from Tuesday’s close of 7,510%. Bond yields rise as prices drop.

"A lot more people are starting to say we might not get an interest rate cut," said Penny Davidson, a bond trader at Nedcor Treasuries.

The rand was at R5,91 (R5,85) to the dollar last night.

Arguing against a rate cut next month, Brait’s Garrow said: "There is a strong correlation between retail sales growth and growth in credit aggregates, particularly instalment sales credit, and that is likely to weigh against the committee moving rates one way or the other. "If anything, the implication from firm numbers is ‘rates on hold’."

Standard Bank chief economist Goolam Ballim said the combination of robust demand for credit, firm income growth, generous fiscal stimulus and a modest recovery in manufacturing had "probably put paid to interest rate relief".

But senior Absa economist John Loos said there were reasons to believe growth in consumer demand could begin to slow down. These included a downturn in economic growth in the fourth quarter of last year, a rising ratio of household debt to disposable income and slowing year on year growth in house prices.

"As a result of our expectation of a mild consumer demand growth slowdown, we believe that further mild rate reductions are possible."

Nedbank’s group economic unit said in a research note that "strong growth in spending … and high international oil prices are potential causes for long-term inflationary concerns for policy makers".

"We believe the (monetary policy) committee will adopt a neutral stance in 2005 in the light of these concerns." With Bloomberg, Reuters