South Africa's annual retail sales growth surged to a 17-month peak in March, data showed on Wednesday, adding to speculation that interest rates might be raised on Thursday to cool domestic demand.
Concerns that the central bank would raise its key repo rate when a two-day policy meeting ends on Thursday sent government bonds tumbling, with the yield on the most-traded R153 maturity spiking 17.5 basis points to 7.75 percent.
Economists said the market was spooked by emerging markets risk aversion, along with the strong retail sales data. "The bond market is telling us that we are cruising towards a rate hike at some stage ... maybe not tomorrow but sooner than the October meeting," said Colen Garrow, economist at Brait.
"The market seems to be adjusting mindsets to a higher interest rates scenario."
Retail sales - the main measure of consumer demand - rose by 10.9 percent, accelerating from 10.3 percent in February, Statistics South Africa said. This was the biggest increase since October 2004 when a rise of 12.2 percent was recorded.
The data was released just after the central bank started a regular two-day meeting on interest rates.
Economists reckon the Reserve Bank will leave its repo rate unchanged at 7 percent, but have not ruled out a pre-emptive hike of between 25 and 50 basis points when the meeting ends on Thursday.
"These numbers would tie in with other figures such as the credit numbers confirming that domestic demand ... remains fairly robust in this economy. Given what the currency has done, the risk of a surprise hike is increasing," said Adenaan Hardien, economist at African Harvest.
South Africa's repo rate was gradually reduced by 6.5 percentage points between 2003 and 2005, pushing prime lending rates down to 10.5 percent - their lowest in more than 25 years.
Low interest rates have fanned strong demand for credit, with household debt as a percentage of disposable income jumping to a record 65.5 percent in the fourth quarter of 2005 from 63.5 percent in the third quarter.
The central bank, which has repeatedly signalled that its bias in monetary policy is towards tightening, has cautioned that the high debt levels may not be sustainable if interest rates were to be raised.
Manufacturing data for April added to the dilemma for the central bank, with production declining by a seasonally adjusted 2.0 percent compared to March's 1.7 percent increase - hit by a large number of holidays, including Easter, during the month.
Manufacturing is the second biggest sector of the continent's largest economy, accounting for more than 16 percent of gross domestic product. It expanded 4.3 percent in the first quarter after contracting 0.3 percent in the fourth quarter.
"Besides the technical issues ... the manufacturing sector, although still looking at positive growth, is not particularly strong," said Chris Hart, an economist at banking group Absa.
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