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Consumer confidence has unexpectedly rebounded – despite a series of interest rate increases and expectations of another hike tomorrow.

December 5, 2007

By Ethel Hazelhurst

Johannesburg – Consumer confidence has unexpectedly rebounded – despite a series of interest rate increases and expectations of another hike tomorrow.

An index compiled by First National Bank (FNB) and the Bureau for Economic Research (BER) rose 4 index points to plus 22 in the fourth quarter from plus 18 in the third.

FNB chief economist Cees Bruggemans said the increase nearly fully reversed the combined decline of the previous two quarters. “The index is now just below the all-time high of plus 23 reached during the first quarter,” he said.

Resurgent consumer confidence is likely to add to pressure on the Reserve Bank to lift interest rates again. The money market is pricing in a hike of half a percentage point in the repo rate when the monetary policy committee (MPC) ends its two-day meeting tomorrow, as well as a possible tightening in January. The rate is 10.5 percent, up 3.5 percentage points since the start of the cycle.

CPIX, the consumer price index (CPI) minus mortgage costs, has breached the ceiling of the bank’s 3 percent to 6 percent target range every month since April. And Rand Merchant Bank (RMB) says it will peak at 7.6 percent in the first quarter of next year, not the 6.8 percent forecast in October.

The market continues pricing in higher inflation. When the Reserve Bank published its monetary policy review last month, it said break-even inflation, linked to the R197 bond, had risen from 4.5 percent in May to 5.1 percent in October. Break-even inflation is the difference between the yield on bonds linked to the CPI and conventional notes of similar maturity.

Mogatla Modisha, a bond trader at Investec Asset Management, said break-even inflation was now nearly 50 basis points higher at 5.51 percent.

However, there is mounting evidence that spending is slowing. Yesterday Standard Bank said growth in its house price index fell from 10.2 percent in October to 6.5 percent in November. Its median house price fell from R595 000 to R575 000.

New vehicle sales last month fell 13.8 percent year on year, after falling 5.9 percent in October.

And the business confidence index, compiled by RMB and Stellenbosch University’s BER, fell five points from 72 in the third quarter to 67 in the fourth – its lowest level since late 2003.

The 50 basis point hike in the repo rate expected tomorrow would push prime and mortgage rates to 14.5 percent, the highest since September 2003.

“As the manufacturing sector is going through a bad period, some would argue that the last thing on the committee’s mind right now should be to raise rates further,” says RMB.

However, it says manufacturing is not under pressure so much because local demand is sharply down, but because exports are under threat, due to “softening global demand, rand strength, capacity constraints and rising labour costs”. And it says the central bank can do little to address these issues.

In the event, bullish consumer confidence may seal the case for a further increase.