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JOHANNESBURG – The rand strengthened more than 1 percent on Wednesday as October’s retail sales showed that the economy began the fourth quarter on a firm footing, shrugging off the poor November inflation data that came in at an 18-month high, which led economists to warn of a likely rate hike.

Statistics South Africa said retail sales rose 2.2 percent year-on-year in October, a big jump from the 0.6percent gain in the previous month and above market expectations of a 1.8 percent increase.

The uptick in retail sales was aided by an increase in purchases for household furniture, appliances and equipment, clothing and footwear as consumers geared for the festive season.

John Ashbourne, a senior emerging markets economist at Capital Economics, said the retail sales figures added to the evidence that South Africa maintained robust growth at the start of the fourth quarter.

“Yesterday’s strong retail sales figures added to the evidence that the economy retained momentum at the start of the fourth quarter. Activity data released on Tuesday showed that growth in the manufacturing and mining sectors accelerated in October,” Ashbourne said.

The rand, which was bid at R14.35 against the dollar before the retail sales were released, strengthened to R14.17 by 5pm.

Retail stocks on the JSE also benefited from the positive retail sales data.

TFG closed the session 2.4 percent up to R172.45, while Truworths added 3.23 percent to R90.39 and Woolworths inched up 0.4 percent to R54.55.

Shoprite saw its stock increase 3.80percent to R118.19, while peers Spar added 1.18percent to reach R195.30 and Pick * Pay inched up 0.22percent to R69.65.

The positive retail sales data added to October’s manufacturing production, which increased 3 percent year on year in October – the biggest gain in manufacturing output since June 2016. Mining production rose 0.5 percent year on year in October, following a 2 percent decline in the previous month with October’s print the first gain in mining output since June.

South Africa’s battered economy came out of recession in the third quarter after growing 2.2 percent.

Retail sales were expected to strengthen further in the quarter, after last month’s Black Friday splurge and a significant cut in fuel prices this month aided spending.

The growth in the economy and the rising inflation data, however, have left the door ajar for further interest rate hikes next year.

South Africa’s central bank last month raised interest rates by 25 basis points (bps) to 6.75 percent, attributing the decision domestic growth outlook that remained challenging.

The stats agency said consumer price inflation rose 5.2 percent on an annual basis in November from 5.1 percent year on year in October.

November’s inflation print was also the highest rate since May 2017.

The inflation rate is now inching closer to the upper end of the central bank’s 3 to 6 percent target range.

Annual core inflation, which excludes the cost of food, non-alcoholic beverages, fuel and energy, rose to 4.4 percent in November 2018 from 4.2 percent in October, the highest rate since May.

Investec Bank economist Kamilla Kaplan said that the risks to the inflation outlook remained to the upside, on possible rand depreciation and above inflationary increases in administered prices, particularly electricity tariffs.

“Should upside risks to inflation materialise, concern over second-round inflation effects would likely see the Sarb hike interest rates further in 2019, likely by 25bps in July,” Kaplan said.