Reserve Bank raises interest rate

South African Reserve Bank Governor Tito Mboweni said on Thursday that the bank had decided to raise the repo rate by 50 basis points to 10,5%. The current tightening cycle that began in June last year increases to 350 basis points.

The announcement followed a two-day meeting of the bank’s monetary policy committee.

The repo is the rate at which the Reserve Bank lends to commercial banks, whose prime lending rate will rise—also by 0,5 of a percentage point.

Ridle Markus, economist at Absa, commented: “This is a bit of a surprise that he hiked despite the short-term deterioration in inflation.
However, the worsening in inflation expectations must have been a key factor. The question now is whether this is the peak of interest rates.”

Said Mike Schussler, economist at T-Sec: “We expected the hike. The chances are that this may be the last hike. However, having said that, we could see one more in this round. The inflationary outlook has deteriorated. I don’t think we will get out of this high inflationary environment in the short term. The hike should be good for the rand and positive for bonds but could negatively impact on the JSE.

“Consumer expenditure is expected to decline in the next few months, but we are wary of forecasts predicting that economic growth will go over 4% next year. We think growth could slow to less than 4% in the next six months.”

While the consensus forecast among 13 economists surveyed earlier by financial news provider I-Net Bridge had been for an unchanged interest-rate stance, the majority also expected this to be the end of the tightening cycle.

Only three of the economists surveyed felt the Reserve Bank would raise the repo rate by 50 basis points to 10,5%. Of the nine economists submitting forecasts on whether the expected increase would mark the end of the tightening cycle, only two felt that the October meeting would not cap the tightening cycle.

One of the economists spoken to by I-Net Bridge expressed an early assessment that rates could start coming down in August next year.

Expectations

After declining during the first quarter, inflation expectations increased during both the second and third quarters, the latest Bureau of Economic Research (BER) Inflation Expectation Survey shows.

Whereas the second-quarter increase of 0,2 percentage points was relatively mild, however, the 0,5 percentage point increase during the third quarter was more substantial, the BER said on Thursday.

“CPIX inflation expectations regarding 2007 increased from 5,4% during 07Q2 to 5,9% during 07Q3. In respect of 2008, inflation expectations increased from 5,3% to 5,8%. Regarding 2009, inflation expectations rose from 5,2% to 5,6%,” the BER said.

“CPIX inflation expectations in respect of 2007 have increased by 1,3 percentage points—from an all-time low of 4,6% during 06Q1 to 5,9% during 07Q3. This is less than actual CPIX inflation (as measured by Stats SA), which increased by three percentage points—from 3,4% during 05Q1 to 6,4% during 07Q2,” it said.

Client Media Releases

NWU consistently among top SA universities in rankings
MTN gears up for Black Friday sale promotion
Software licensing should be getting simpler, but it's not
Utility outages: looking at the big picture
UKZN scientists get L'Or'eal-UNESCO Women in Science grants