Broad-based SA recovery remains elusive and thus so will rate hike

Recent bond price action, the fact that FRAs (forward-rate agreements) currently price in a 50bp hike by South Africa's Pretoria-based Reserve Bank (SARB) by November 2011 and a recent breakeven rate uptick all suggest that the market now views inflation risks to the upside, particularly on the back of news that various municipalities have applied to raise electricity charges as much as 28 percent from July 1 versus the electricity regulator's 20.38 percent guideline.  Yet some analysts counter that given CPI's hitherto muted trends (core roughly 3 percent through the first four months of 2011, with headline at 4.2 percent annualized in April) the Bank, which contrasts price data with a 6 percent implicit target, will more likely hold off until January 2012 given recent manufacturing (up 0.4 in April, down from 4.9 percent in March) and wholesaler and retailer business confidence data (48.0 compared to 55 percent in the 1st quarter) that underscores a lingering output gap (manufacturing and mining production remain below pre-recession levels by ~14.5 and 3 percent, respectively, the former reflected again by a disappointing Q1 79.4 percent manufacturing capacity utilization level)–rationale which should serve as the foundation against premature tightening.  To that end, demand-pull inflationary pressures look moderate, according to Absa Capital, as both retail sales (9.8% y/y in April after March's revised 5.3% growth) and credit metrics may have now peaked such that elevated consumer debt levels (77.6% of disposable income)–which initially pushed annualized retail price inflation (1.8 y/y in April) back into post-crash, positive territory–will now serve as a headwind and stunt further spending momentum.  Until the recovery is truly “broad-based” look for the SARB to remain dovish and the rand to weaken.