Baptism of fire for minister

December 11, 2015, 4:47am

Desmond van Rooyen Photo: Bloomberg/Waldo Swiegers  

By Ntsakisi Maswanganyi, Business Day Live

NEW Finance Minister Desmond van Rooyen got a rude reminder on Thursday of the tough task he faces. Data showed consumer confidence has collapsed, and expectations are that inflation will rise.

Low consumer confidence indicates muted spending this festive season and not much cheer for retailers, while higher inflation — coupled with the significantly weaker rand — means interest rates could be raised next month.

Business confidence is also at historic low levels.

Consumers are pessimistic about their financial positions, the economic outlook and buying durable goods, according to the consumer confidence index from First National Bank/Bureau for Economic Research (FNB/BER). The index fell to -14 in this quarter from -5 in the third quarter, the lowest in close to 14 years.

Other data out on Thursday from the BER showed inflation expectations for this year increased 0.1 percentage points to 5.6% compared with the third quarter, while those for next year also rose 0.1 percentage points to 6.2%. Expectations for 2017 were up 0.3 percentage points to 6.2%.

The expectations for next year and 2017 are now firmly outside the Reserve Bank’s 3%-6% target band.

Expectations of higher inflation encourage businesses to raise prices and workers to demand bigger wage increases, which fuels general price increases. That would require a rate hike to cool the rise.

The Bank has said it was concerned about inflation expectations going beyond the target band.

The plummeting rand was likely to "add further risk" to an already problematic inflation outlook, BNP Paribas Securities economist Jeff Schultz said.

The Bank was "acutely aware" that it needed to maintain credibility. A 25 basis point increase next month remained a possibility, he added.

The Bank is in a hiking cycle, but a stagnating economy could make it stay its hand.