At the MPC's January meeting Mboweni and his colleagues decided that growth concerns outweighed deterioration in the outlook for inflation. The decision to keep the repo rate on hold at 11% and the prime rate unchanged at 14,5% showed that South Africa's central bank believed the cost of containing inflation further would be too high in terms of economic growth foregone. The question now is whether that's still Mboweni's thinking.
You can't draw too many inferences from Mboweni's recent comments at the release of the Bank's latest Quarterly Bulletin. But in the published notes on the website, one comment stands out: "The resolve of the Bank to bring inflation back within target over time should not be underestimated."

In reported comments, Mboweni also said that he hoped his hand wouldn't be forced on interest rates. So it sounds as if he's leaning towards being more hawkish. But hawkishness would be a mistake if recent confidence indicators are anything to go by.

The Bank does take note of confidence indicators - but probably not to the extent that it should. The importance of those indicators is that they show what's going to happen in the future. And if recent confidence releases are anything to go by, SA's economic future looks quite bleak.

The Rand Merchant Bank (RMB)/Bureau for Economic Research (BER) business confidence index plummeted by 19 index points - from 67 during the last quarter of 2007 to 48 during the first quarter of 2008. That means while two-thirds of respondents had been satisfied with prevailing business conditions before, fewer than half are currently satisfied. Business confidence is now at its lowest level in seven years.

The 19 index point plunge in business confidence is the biggest drop between consecutive quarters in 24 years. The last time confidence fell by such a big margin was during third-quarter 1988 (when the index declined by 18 points).

RMB/BER says the sharp fall in business confidence during first quarter 2008 reflects a deepening slowdown in business volumes, profitability coming under pressure, as well as increased economic and political uncertainty. RMB/BER says the most important factors affecting business volumes were last year's interest rate hikes, the tightening of credit standards (after the introduction of SA's National Credit Act), escalating inflation (which erodes the real purchasing power of households and consequently their spending), as well as electricity blackouts in January and February.

Results from the BER's retail survey show the confidence levels of retailers declined dramatically during first quarter 2008. Having tumbled from a record high of 91 index points during second quarter 2007 to 71 index points in fourth quarter 2007 the confidence levels of retailers dropped further to 52 index points during first quarter 2008 - the lowest level in five years. BER economist Linette Ellis says in the past such a dramatic turnaround and low level of retailer confidence typically signalled the beginning of a recession in that sector. Official retail sales figures for the full quarter aren't yet available, but Ellis says the BER's latest survey results suggest that retail sales volumes contracted during the first quarter. She says the majority of the BER's respondents expect retail sales to continue to contract during second quarter 2008.

The BER's respondents in the semi-durable goods (for example, clothing and footwear), non-durable goods (food, beverages and pharmaceutical products) and durable goods (furniture and household appliances) sectors all reported lower sales volumes compared to first quarter 2007. Ellis says that's a clear signal that the weakness now extends past the interest rate/credit-sensitive new vehicle and furniture and appliances categories to include clothing and footwear and food and beverages.

"Apart from rapidly deteriorating sales growth, the decline in overall retailer confidence can also be ascribed to increasing margin pressure and plunging profitability levels and possibly the negative sentiment provoked by the recent spate of power failures," Ellis says.

"It's clear that semi-durable and durable goods retailers are feeling the pinch from the four percentage point hike in the prime interest rate since June 2006 and tighter credit standards after the implementation of the National Credit Act in June 2007.

"In light of those developments, the BER has made a significant downward revision to its forecast for overall consumer spending - we now expect real consumer spending to increase by between 2% and 3% in 2008, compared withan estimated 7% in 2007 and 8% in 2006." The BER says that the number of non-durable goods retailers reporting higher selling prices surged to a five-and-a-half year high during the first quarter.

"More aggressive pricing by non-durable goods retailers may have bolstered profitability in the sector, but isn't good news for consumers, as it suggests that food prices are still on the increase," Ellis says.