Gross domestic expenditure — which measures demand from companies, households and the government — grew an annualised 5,75% from January to March compared with 12,25% in the final quarter of last year, the Reserve Bank said in its June quarterly bulletin.

That suggests a cumulative 2,5 percentage point increase in lending rates since the middle of last year was starting to curb spending and borrowing levels — one of the main threats to a deteriorating inflation outlook.

But household spending — a key indicator for consumer demand — rose 7,5% in the first quarter, slowing slightly from 7,75% in the previous quarter, as demand for new motor vehicles ebbed.

The robust pace was driven by increased employment and wage settlements above the top of the official 3%-6% inflation target range, the Reserve Bank said.

At the same time, household debt as a percentage of disposable income rose to a record 76% in the first quarter from 73,74% in the previous quarter.

Bank officials said the ratio of debt service costs to disposable income also climbed during that period, reaching 9,5%, its highest since 1999.

Revised figures put the ratio at 8% last year and 6,8% in 2005.

“With confidence high, the economy growing briskly, domestic expenditure strong, employment rising, credit extension buoyant and asset prices increasing … the potential for adverse price shocks to fan the flames of inflation is amplified,” the Bank said .

That suggested the Bank may raise interest rates in August, after governor Tito Mboweni hiked the key repo rate by half a percentage point to 9,5% this month.

“The quarterly bulletin reinforces our expectation that the Bank will have to hike at least one more time to stave off inflation pressures, while the rand is vulnerable to external funding needs,” Citigroup economist Jean-Francois Mercier said.

Reserve Bank analyst Nombulelo Gumata said that the Bank expected new lending regulations which took effect this month to further curb demand for credit, but the extent was likely to be known only by the fourth quarter.

Nominal wage growth in the formal nonagricultural sector quickened to 9,1% in the fourth quarter of last year — a two-year peak — from 4,5% in the last quarter of 2005.

Independent labour consultancy figures showed average pay increases were 6,5% all of last year and grew at the same pace in the first quarter of this year.