Eskom tariff ruling wait is almost over

A barrage of important economic data this week may be eclipsed on Wednesday by the long- awaited decision on Eskom’s electricity price hikes over the coming three years.

The power utility has scaled back its initial request to the National Energy Regulator of SA for a 45% increase, to 35%, but even that would take a toll on growth, and push inflation higher.

“This will probably have the biggest market impact as a positive significant surprise on this front could open the door for another rate cut,” said Rand Merchant Bank economist Carmen Nel.

Inflation forecasts from the Treasury assume a 35% annual rise in power tariffs, which would keep inflation at the top end of its 3%-6% target range.

The Reserve Bank assumes price hikes of just 25%.

The information will help the Bank’s monetary policy committee, which meets next month, decide whether there is scope for a rate cut this year or not.

The Bank lowered its key repo rate by five percentage points between December 2008 and August last year to jolt SA out of its first recession since 1992.

But the playing field looks a bit different after Finance Minister Pravin Gordhan said on the heels of his budget last week that he had given the Bank a more “flexible” inflation mandate.

That means the growth, credit and trade data this week could take on added importance for the Bank’s pending interest rate decision.

Figures for gross domestic product (GDP) in the final quarter of last year are crucial, given that SA’s economy emerged from recession only in the previous quarter.

“Given the recent hype over whether the South African Reserve Bank will cut interest rates further, we view the GDP figures as one of the key factors that could swing in favour of another rate cut,” Standard Bank said on Friday.

The data are due from Statistics SA tomorrow.

Consensus forecasts from Reuters suggest that GDP growth quickened to 2,5% from 0,9% in the third quarter, driven mainly by a rebound in manufacturing output.

Mining output also improved, while there was a slower pace of decline in retail sales, another of the economy’s main sectors.

Inflation figures for last month — due on Wednesday — are expected to show a 6,4% annual rise in the consumer price index, up from 6,3% in December.

The measure had breached its target every month since April 2007, before subsiding within the range in October and November last year.

Higher petrol prices combined with the high number of surveys during the month — insurance costs, funeral expenses, gymnasium fees and lotto tickets — will have put upward pressure on the data.

But Citigroup economist Jean- Francois Mercier expects one of the core measures of inflation — which excludes food, petrol and energy — to have dipped to 6% from 6,3%.

Gordhan’s “somewhat ambiguous statements” after his budget speech last Wednesday — “making it unclear whether the inflation targeting mandate of the Bank is made de facto more flexible — may lead some market participants to expect an additional rate cut,” Mercier said.

Most analysts believe Gordhan’s remarks — and a letter from him to the Bank’s governor, Gill Marcus — have clarified the way the Bank sets interest rates, which was not fully understood by the public.

The letter, sent just ahead of the budget, set out all the economic variables the Bank considers when making its interest rate decisions.

“These aspects have long been part of the Bank’s flexible approach to inflation targeting,” said Standard Bank in a research note.

Producer price figures on Thursday are likely to show that prices at SA’s factories, farms and mines climbed by 1,9% last month, after a 0,7% rise in December.

On Friday, the Bank is to release credit extension data for the private sector.

These are likely to show that borrowing by companies and households fell 1,2%, steeper than a 0,8% decline in December.

Nonetheless analysts believe the worst is over for borrowers.

Source:, 20100222

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