S.Africa's inflation quickens, higher rates possible

By Stella Mapenzauswa

JOHANNESBURG (Reuters) - South African consumer inflation accelerated in January while separate retail sales data for December pointed to rising demand that may lead to higher interest rates by the end of the year.

Consumer demand is trekking steadily upwards in Africa's biggest economy after a contraction during 2009, helped by 650 basis points of interest rate cuts since late 2008 that have left borrowing costs at historic lows.

Data on Wednesday showed consumer inflation quickened to 3.7 percent year-on-year in January from 3.5 percent in December, mainly due to higher food and fuel costs.

Retail sales also grew by 8.3 percent year-on-year in December compared with 8.0 percent in November, outpacing market expectations of a 7.7 percent increase.

A sustained upward trend in inflation in the next few months could increase chances of interest rates rising by the end of 2011 to help keep it within the central bank's 3 to 6 percent target band.

"I think the trend is what we've got to look at. I think there is enough cost pressure in the pipeline to indicate it is going higher," said Brait economist Colen Garrow.

"The big issue is whether it's going to challenge the upper end of the target range by the end of the year. My feeling is that it may, and it is also likely to encourage the Reserve Bank to put rates up before the end of the year."

The rand strengthened after both sets of data on Wednesday, firming to a session low of 7.26 against the dollar. It was last trading at 7.2855, up 0.81 percent on the day.