South African Reserve Bank Governor Tito Mboweni’s words in mid-November that South Africans need to tighten their belts came home to roost on Thursday when he put a dampener on the Christmas spirit by raising the repo rate by 50 basis points to 9%.
In mid-November he sent a strong message that this rise was coming when he said that, if in the view of the Monetary Policy Committee (MPC), the inflation target was being threatened by inflationary pressures, the MPC would have the courage of its conviction to do the correct thing even as South Africa entered the festive period.
On Thursday he followed through via another 50 basis-point rise, taking the current increases since June to 200 basis points.
Mboweni delivered another hawkish address on the inflation outlook on Thursday, picking out the continued high demand for credit and resilient consumption patterns as major blights on the future inflation outlook. The usual suspects, food and volatile oil, were again raised as key concerns going forward.
He added in November that his message was still that South Africans must all try to tighten their belts, and the general tone of his speech on Thursday was that more of the same is required before the tightening cycle can be halted.
According to Dawie Roodt, chief economist at the Efficient Group, the “decision was exactly as expected and the market is not reacting. This is extremely boring — it’s exactly what a central banker is supposed to do. February’s stance is still uncertain.”
Mike Schussler, economist at T-Sec, said: “It is exactly what the market was expecting. I suspect we will get another rate hike in February. There’s a 60% to 70% chance of getting another one in April,”
The recent spate of poor economic data, including unexpectedly strong credit growth at 27,5% and a leap in producer-price inflation to 10%, had raised particular concerns last week that the tightening cycle could last past February next year.
Mboweni said that the rand volatility poses risks to the inflation outlook due to the related uncertainty. He said the rand was now at about 7,10 to the dollar from 7,70 at the previous MPC meeting.
The 50 basis-point increase takes the repo rate to 9% and will take the prime overdraft rate to 12,5%.
The repo rate rose as high as 13,5% in September 2002, before receding to 7% in April 2005, with the current tightening cycle beginning in June 2006.
Meanwhile, the Congress of South African Trade Unions (Cosatu) said on Thursday it was appalled by the MPC’s decision to raise base lending rates.
In a statement, the union federation said: “Cosatu sees the Reserve Bank inflation-targeting policy, through the use of the interest-rate tool, as a major deviation from the developmental agenda that South Africa needs.
“The imprudent policy of dealing with inflation as a key economic challenge remains problematic for a developing country that faces major problems such as high unemployment, mass poverty and sluggish growth. Inflation targeting is a policy adopted by countries with developed economies and unemployment below 10%.
“It is totally unsuitable for a developing economy like South Africa [that] has massive problems of unemployment and poverty.” — I-Net Bridge