Although no economists forecast a change in interest rates when the South African Reserve Bank’s (SARB) monetary policy committee (MPC) meets next week, this does not necessarily mean that the MPC may not raise the repo rate by a cautionary 25 basis points.
On October 16 2000 the MPC raised the repo rate by 25 basis points “in view of the likely effects of these changes [oil prices and current account deficit] on future price developments and expectations”.
The MPC then “concluded that a modest increase in interest rates at this stage may avoid later steep increases in rates in order to meet the inflation target”.
The next move in the repo rate was in fact a surprise 100 basis points cut in June 2001, when only one economist forecast a cut of such a magnitude.
In the past few months the Opec basket oil price has risen from $24,82 a barrel on September 22 2003 to $32,54 a barrel on April 15.
The retail petrol price in South Africa has risen by 16,1% from its January price of 378 cents per litre to its current price of 439 cents per litre in Gauteng.
The current account balance has swung from a surplus of 0,6% of gross domestic product (GDP) in 2002 to a deficit of 1,8% of GDP in the fourth quarter of 2003.
The main reason for increasing interest rates next week, rather than waiting until the increase in inflation is confirmed by the data, is the approach of the main wage negotiations in May.
Most of the large employment sectors such as the civil service, mining and engineering sectors start their negotiations in May with the intent of implementing the new agreement in July.
South Africa’s CPIX inflation (headline inflation excluding mortgage costs) rose to 4,8% year-on-year (y/y) for metro and other areas in February 2004 compared with 4,2% y/y in January and 4% y/y in December.
The SARB’s inflation target is to keep the y/y rate for CPIX within a range of 3% to 6% and most economists still expect CPIX to stay within range this year, but there is increasing concern about the oil price and wage rates.
Last year the consensus forecast of economists was wrong four times as the SARB cut five times for a total of 550 basis points.
Next week the consensus is for no change in rates, but the SARB may still surprise economists once again.
If so, the likely direction of that surprise is for a cautionary hike, rather than a cut given the recent rise in oil prices and inflationary pressures. — I-Net Bridge