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Retail slump backs case for Bank to show mercy

Retail sales fell for the fourth month running in June, backing the case for the Reserve Bank to keep interest rates steady when its monetary policy committee ends its meeting today.
Sales at constant prices fell 2,6% versus the same month last year after a 3,4% dive in May, prolonging the decline in the economy's third-biggest sector to levels last seen in 1999, official data showed yesterday.

“The figures are another piece of the puzzle that supports the case to keep monetary policy steady,” said Goldman Sachs economist Ashok Bhundia.

“Technically, the retail sector is on the edge of a recession if not already there.” A recession is defined as two quarters of contraction in a row, and SA's overall economy is still expected to expand 3% this year, well below the 5,1% of 2006.

Growth in retail sales, which account for 14% of the economy, has slowed steadily since the middle of 2006, when the Bank began raising interest rates in a bid to curb inflation.

Stats SA said the sector contracted in six of the past eight months, and declined 0,7% in the first half. That trend was last seen in the first half of 1999, when prime lending rates were above 20%, versus 15,5% now.

Markets expect the Bank to keep the repo rate steady at 12% today in response to a more benign long-term inflation outlook and mounting evidence that growth is stalling.

Lending rates climbed by five percentage points since June 2006, pushing debt service costs for households up to 11,3% of disposable income, also a nine year peak. Interest rate changes take one to two years to make themselves fully felt, so there is more pain to come for consumers and companies even if the Bank keeps rates on hold.

“Since consumer demand is one of the main drivers in the economy, the retail data support the argument for an unchanged stance in interest rates,” said Efficient Research economist Doret Els.

Consumer spending comprises about 60% of gross domestic product. Figures from the Bank, which give a broader picture of the trend, show household expenditure slowed to 3,3% in the first quarter of this year from a cyclical peak of 9,5% at the end of 2006.

Vehicle sales and house prices were hit hardest, along with durable goods. Analysts warn that today's decision is still a close call as inflation is set to race further above its 3%-6% target range in the next few months, after rising a record 11,6% in June.

Labour unions joined the debate yesterday. The Federation of Unions of SA urged the Bank to be more transparent and consult more widely on interest rates. In an open letter to Bank Governor Tito Mboweni, Fedusa called for the publication of minutes of monetary policy committee meetings as is the case in the UK, Japan and Sweden. It also proposed the inclusion of representatives from outside the Bank on the committee, as with the Bank of England, which also targets inflation.

“Our international survey shows SA is frankly lagging far behind,” it said.

Fedusa members are mainly white collar workers and it is SA's second largest labour federation. Trade union Solidarity also urged the Bank yesterday to stop raising interest rates.

Falling oil prices and changes in the way consumer prices are calculated are expected to lower inflation next year, paving the way for interest rate cuts.

Source: Business Day

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