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South Africa: Central bank maintains interest rates South Africa

2011/02/25

Central bank maintains interest rates

South Africa

After a three-time slashing of interest rates in 2010, the South African central bank has decided to retain its benchmark interest rate at a 30 year low of 5.5%, encouraged by signs of recovery including strong consumer spending. Retail sales, which account for two-thirds of the South African economy’s expenditure, rose at their fastest pace in the four months to November, thanks to low interest rates and a surge in the rand. Sales shot up by an annualized 7.8% in November compared to 6.5% in October.

Healthy sales nudged the Business Confidence Index (BCI) up by 0.6 points to 87.6 for the second month in December from 87 in November. But the indicator might be affected any time due to fluctuating household spending, investment and employment. According to the South African Chamber of Commerce and Industry (SACCI), “It will be challenging to muster the momentum towards growth while investment and household spending are driven by credit and while employment and fixed investment remain subdued.” While households are still recovering from heavy debts, the country’s unemployment stands at 25.3% of the workforce, making the situation worse.

Meanwhile, manufacturing climbed 4.6% year-on-year in November 2010, powered by an increase in the production of vehicles, components and accessories. The Purchasing Managers Index (PMI) fell to 51.7 in December from 52.9 the previous month. However, the PMI continued to keep its head over the crucial 50 point mark for the second month in December, indicating consistent improvement in factory production.

Vehicle sales registered a 25% rise in 2010 and a jump of 30% for the month of December. New vehicle sales totaled 39,504 units in December compared to 30,407 units in December 2009. The prospects for the year ahead look bright. The National Association of Automobile Manufacturers of South Africa (NAAMSA) forecasts domestic vehicle sales to increase 12% to 550,000 in 2011, while exports are expected to rise by 26%.

South Africa posted a trade surplus for the first time in nearly ten years in November totaling $1.3 billion, which came as a relief after the deficit of $450 million in October. The surplus was due to a 20.8% increase in exports for the month of November, the result of a spike in raw materials like iron ore. There was a 2.4% drop in imports due to an 11% dip in purchases of components. Overall for the year 2010, exports rebounded in the first 11 months of 2010, bringing the trade deficit down to $708 million compared to the huge $4.1 billion deficit during the same period in 2009.

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