Reserve Bank seen raising rates again this week

South Africa’s central bank is expected to raise its repo rate next week, probably for the last time this year, as it battles to curb rising inflation, a

Reuters survey showed on Friday.

The survey of 20 economists predicted the Reserve Bank’s monetary policy committee (MPC) would hike the repo by 100 basis points to 12,50%—the third increase of that amount this year.

The MPC is scheduled to meet on Wednesday and Thursday—three weeks after central bank governor Tito Mboweni told business leaders he would use his two votes for an increase of more than 100 basis points. The MPC has seven members.

“The governor has practically confirmed the hike. Economic fundamentals remain such that an increase would be prudent,” said Adenaan Hardien, an economist at African Harvest.

Inflation is on an upward trend, fanned by the rand’s 37% plunge last year.
The benchmark CPIX inflation measure strayed out of its three to six percent target range for 2002 for the sixth consecutive month in April, rising by an annual rate of 8,8%.

Producer inflation surged 14,8% in April, its highest annual increase since December 1989. Analysts said despite the rand’s sharp recovery in 2002, there were still inflationary pressures in the economy, citing as an example the recent nine percent salary increase awarded to civil servants.

The rand has appreciated by about 22% against the dollar so far this year largely due to broader greenback weakness, an improved outlook for commodity prices and higher interest rate differentials.

SLIGHTLY WEAKER RAND SEEN

“The wage increase granted to civil servants will keep some inflationary pressures in the system. I think the Reserve Bank will try to influence expectations now to try and meet the target next year,” said Standard Chartered Bank economist Razia Khan.

Most analysts reckon current rand strength, if sustained, could encourage the central bank to keep interest rates on hold after the June MPC meeting. “This (increase) would be the last one. The rand needs to remain strong…we do see slight depreciation for the year. As long as it remains just above the 10 per dollar level there won’t be inflationary pressures from that side,”

said Absa economist Matthys Strauss.

A majority of economists predict CPIX inflation falling in the upper-end of the three to six percent target next year as a result of measures taken this year, which they said eliminated the need for further tightening.

Inflation next year was also seen benefiting from high base effects. Further rate increases are seen dampening already sluggish economic growth.

But a small group of economists believe the Reserve Bank will raise its key lending rate again at the September meeting.

“We see another 100 basis points increase in September. Inflationary pressures might be stronger than currently understood and we are worried about wage increases,” said Lehman

Brothers economist Tolga Ediz.

“Inflation might not fall as fast as the Reserve Bank might want,” he said. - Reuters

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