The South African Reserve Bank (SARB) raised its key repo rate, at which it lends money to commercial banks, by half a percentage point to 8% on Thursday, in line with expectations, and warned that the inflation outlook has deteriorated in the past few weeks.
This means the prime interest rate is to rise to 11,5%.
SARB Governor Tito Mboweni told a televised press conference after a meeting of the bank’s monetary policy committee (MPC) that the targeted CPIX inflation rate is expected to breach the upper end of its target range for the first two quarters of 2007.
All 16 economists polled by Reuters last week had predicted the SARB would raise its repo rate by half a percentage point to 8%, after kicking off a cycle of rising interest rates with a similar increase on June 8.
That was the first rise in lending rates in the continent’s biggest economy since September 2002. Cumulative cuts amounting to 6,5 percentage points between 2003 and 2005 had reduced commercial lending rates to 25-year lows.
Mike Schussler, economist at T-Sec, commented: ”It was as the markets expected and it won’t make much difference to bonds or the rand. One has to read the statement to see if we can expect any more hikes.”
Said Chris Hart, treasury economist at Absa: ”Looking at the governor’s demeanour, I was waiting for a bombshell. But there wasn’t a bombshell. I think 50 basis points was entirely appropriate given the current circumstances. I feel the policy decision-making is becoming far more holistic now, which is a positive and encouraging development. I also didn’t think the statement was particularly hawkish.”
”Wonderful,” said Dawie Roodt, chief economist at the Efficient Group. ”It was the correct thing to do — 50 basis points. We expected another one in two months’ time and another two months after that — so, another 100 basis points before the end of the year.
”It is better to go for small steps than big ones and fortunately the Reserve Bank started early in the cycle and didn’t wait too long.”
Mboweni said domestic inflation is on an upward trend, with food-price inflation adding to the pressures emanating from persistent petrol-price increases. Household consumption spending has also continued to grow at a strong pace and consumer confidence remains high.
This has been reflected in strong credit extension, and preliminary indications are that the deficit on the current account of the balance of payments might have remained high in the second quarter.
”These factors, combined with a general depreciation of the rand, have resulted in a further deterioration in the inflation outlook,” Mboweni said.
In the recent past there has also been considerable volatility in international financial markets in general, and in emerging markets in particular. These developments have centred on the uncertainty about the future path of interest rates globally. However, the latest developments appear to suggest that some calm might be returning to the financial markets, as evidenced by the narrowing spreads on emerging-market debt.
Mboweni added that since the previous meeting of the MPC, the inflation forecast of the SARB has deteriorated moderately. The most recent central forecast of the central bank projects inflation to peak above the 6% level and remain outside the target range for the first two quarters of 2007.
Thereafter, based on the current assumptions, CPIX inflation is projected to decline slowly to reach a level marginally above 5% by the end of 2008.
While the rand has exhibited considerable volatility since the last MPC meeting and depreciated by about 14% on a trade-weighted basis since the beginning of the year, the prospects for the currency going forward and the associated risks to inflation will depend to some extent on the global interest rate, he said.
There is, however, a possible risk to the exchange rate if the deficit on the current account of the balance of payments is perceived to be unsustainable.
Preliminary indications are that economic growth, although still robust, continues to show some moderation compared with the 4,9% achieved in 2005, and consequently poses little threat to the inflation outlook.
International oil prices, however, remain a significant source of concern.
Colen Garrow, economist at Brait, commented: ”The decision was pretty much as expected. The central bank is clearly targeting something and that is not inflation. It is concerned about the current account and its effect on the rand and its impact in turn on inflation.”
Said Magan Mistry, economist at Nedbank: ”It was pretty much as expected with credit growth, domestic spending, rising inflation expectations, the widening trade and current account deficits and higher oil prices being highlighted and leading them to hike, and I believe 50 was appropriate.” — Reuters, Sapa, I-Net Bridge