The South African Reserve Bank (SARB) opted on Thursday to increase its key repo rate by 50 basis points to 10%, its monetary policy committee (MPC) said.
The repo is the rate at which the SARB lends to commercial banks, whose prime lending rate will rise — also by 0,5 of a percentage point — to 13,5%.
The Deputy Governor of the SARB, Xolile Guma, told reporters in Pretoria the increase will take effect from Friday.
The MPC had considered the outlook for inflation and found the risks to be on the upside. CPIX (consumer price inflation excluding mortgage costs) had risen above the bank’s target range of 3% to 6% and was expected to remain outside that range until the second quarter of next year. The bank expected inflation to trend lower in 2009, Guma said.
Food price inflation remained a threat, despite recent declines in the price of meat. While the domestic petrol price had fallen since the MPC’s last meeting in June, the risks were still on the upside. Household consumption expenditure remained robust, despite declines in sales of furniture, appliances and equipment.
Credit extension to the private sector remained high, and it was too early to assess the effect of the National Credit Act, which came into effect on June 1 to help curb reckless lending.
Wage settlements had been trending up. Last year, wage increases averaged 6,5%, but in the first half of this year had averaged 6,8%. Some settlements had been closer to 8%, Guma noted.
This was not a problem if labour productivity increased as well, but pay settlements remained “of some concern” because of the effect of wages in price formation.
Guma noted that the bank had built up its gold and foreign-exchange reserves in July by $1,06-billion to a gross figure of $29,33-billion.
Despite the recent sell-off, the stock exchange remained 8% up on the year to date at Wednesday’s close.
‘As expected’
Said Mike Schussler, economist at T-Sec: “The decision was much as expected. I think it will be negative for the equity markets, but is seems to be slightly positive for the rand. Certainly for the inflation outlook and bonds, it will be better.”
Markus Ridle, economist at Absa, commented: “We are not surprised, as all the inflationary signs were there signalling an interest-rate hike.
“We would have been surprised if it went lower as food prices have been a major concern, and the rand at approximately the R7,50 level is also a potential inflation risk for future months. It was a very sensible decision and I agree with most of the points that he mentioned.”
Lumkile Mondi, economist at IDC, said: “I’m very disappointed that the Reserve Bank has raised rates amid such market volatility stemming from the United States credit market. I think the hike would squeeze liquidity within our market.
“I expected the MPC to have acted more cautiously given the uncertainty in the markets and because inflation pressures were caused by oil and food prices, which are beyond the control of the bank.”
The increase is insufficient to stabilise the rand and won’t bring relief to the stock market, said Colen Garrow, chief economist at Brait. “It taints GDP growth prospects and on balance I think there are more risks to hiking rates today in the current global environment than perhaps has been considered.
“I think the decision is one that introduces negative risks. I think it shouldn’t have been about adjusting rates today — there may have been a more appropriate time to hike rates. The key central banks are standing by their markets by providing support, but today’s decision doesn’t do that for South Africa.”
Market talk
Some market talk had been doing the rounds in financial circles earlier on Thursday that due to the credit crisis currently gripping global markets, the MPC would err on the side of caution and not raise rates.
However, a senior economic analyst said that while the probability of there not being a hike had “ticked up a bit”, it was likely the MPC would stick to its guns and hike by 50 basis points due to other concerns. However, he added that the current credit crisis would likely affect future decision-making.
“The content of the rumour doing the rounds is that liquidity is so tight the United States needs to cut rates and Europe keep them on hold and that our own central bank will have to follow suit — that they need to keep rates on hold to see how things pan out,” explained ETM economic analyst Russell Lamberti.
He emphasised that his view was that the MPC would still raise rates, but that the current situation was not insignificant and could be a factor capping rates going forward.
Another issue in the global context is that with the rand weakening and sentiment pretty sketchy globally, higher rates locally may be needed to attract the carry-trade and thereby retain foreign capital. “However, I wouldn’t push this argument too strongly,” said Lamberti.
He said the MPC would likely refer to inflation, credit growth and inflation expectations remaining high as reasons for the hike.
“Beyond today, however, these global issues should definitely play a role,” he added. “A few other reasons coming to the fore will be things like the lower retail sales — especially among household durables — and car sales.” — I-Net Bridge, Sapa