Ayanda Shezi

Economics Correspondent

IN a relatively quiet week on local markets, the spotlight falls on the Reserve Bank, as its monetary policy committee (MPC) meets on Wednesday and Thursday to deliberate on interest rates and the outlook for monetary policy.

The MPC will, as usual, have its work cut out, as persistently high oil prices and strong consumer demand threaten the Bank’s inflation targeting model.

A rate cut at this stage would just add fuel to the fire, analysts say, but a rate hike is also unlikely this year, unless CPIX inflation (the consumer price index less mortgage costs) threatens to breach the Bank’s upper limit of 6% — which is unlikely.

CPIX rose to 4,8% year on year in August, largely on the back of an increase in fuel prices following the rise in prices for international crude oil.

According to analysts and the Bank, oil prices remain the single largest risk to the economy’s inflation outlook, and any signs of second-round effects will need to be stopped, to avoid creating an inflationary spiral.

Once retailers start increasing general prices as a result of rises in transport costs, workers are more likely to ask for wage increases as their disposable income declines.

In April, when CPIX averaged about 3,4%, the Bank trimmed rates by 50 basis points, bringing the repo rate to 7,0%. By August it was averaging 4,1%, prompting the Bank to move its forecast for CPIX to around 5,5%.

"With oil prices even higher now, their inflation projections has likely deteriorated further," says Merrill Lynch economist Nazmeera Moola.

This week the Bureau for Economic Research (BER) will release its survey of inflation expectations for the third quarter of this year, which is expected to show upward pressure.

JP Morgan economist Marisa Fassler says the tone of the MPC statement is likely to be more hawkish than it was in August. "The MPC will be cognisant of its responsibility to manage inflation expectations in a rising inflation environment," she says.

CPIX is nonetheless seen remaining within the 3-6% target band for the next two years.

Interest rates, at 25-year lows, have fuelled a domestic spending spree over the past two years, as evidenced by retail sales, vehicle sales and consumer demand figures, all of which have accelerated to record highs over the past few months.

Households are living beyond their means, with household debt rising to 62% as a percentage of disposable income, its highest level in six years. "It is clear that domestic demand has increased notably on the back of looser monetary conditions and a stronger rand, and needs no further stimulus," says Moola.

Up to now households have been able to fund their debt comfortably, as interest rates remain low. However, with rates expected to climb next year, households could be headed for trouble.

"Mortgage advances, leasing finance and instalment sales credit indicate that the accumulation of assets by South African consumers is not likely to go unchecked, especially since these are financed increasingly by credit," says Brait economist Colen Garrow.

Moola says that although mitigating factors exist, such as moderate wage settlements in this year’s wage negotiations, falling administered prices and continued low food-price increases, the first-round effect of high oil prices has already been felt quite strongly in the inflation numbers.

Manufacturing production data will be released by Statistics SA on Wednesday, and activity in the sector is likely to have picked up from July’s growth of 2,4% year on year.

The Investec/BER purchasing managers’ index, which is considered to a be a leading indicator of manufacturing activity, showed that managers remained optimistic about the sector, with the index at 56,3 points in August.

Producers continue to benefit from strong domestic demand, but there is a risk that softening global demand could negatively affect production in the final months of the year, says Fassler.

Strike activity during the month is expected to have had some effect on performance, although this is likely to be limited.

Thursday sees the release of mining production data. Production is likely to have been adversely affected by the four-day miners’ strike in the gold sector in early August.

On Tuesday First National Bank and the BER release figures for the consumer confidence index for the third quarter.

The index declined to 17 in the second quarter, from 19 in the previous three months.