/ 6 December 2007

Interest rate climbs again

South African Reserve Bank Governor Tito Mboweni on Thursday raised the repo rate by 50 basis points following a two-day meeting of the bank’s monetary policy committee (MPC). This is in line with market expectations.

The increase pushes the repo rate to 11%, the prime overdraft rate to 14,5% and the tightening cycle that began in June last year to 400 basis points.

The repo is the rate at which the Reserve Bank lends to commercial banks.

The balance of the risks to the inflation outlook continues to be on the upside, said Mboweni. In his address he fretted over the usual suspects — oil, food and electricity prices.

A rise in petrol and food prices caused inflation to rise to 7,3% in October — above the Reserve Bank’s 3%-to-6% target range for a seventh consecutive month. Inflation is now considered likely to rise to more than 8% in coming months.

The price of petrol has risen by 36% this year and food prices were up 12,4% in October, compared with the same month last year.

The MPC will meet again in January to discuss rates.

Said Mike Schussler, economist at T-Sec: “The adjustment is in line with expectations. The market has in general already priced the adjustment in, and I don’t think the decision will have a big effect on the market. In the longer term, we have started to see a slowdown in growth and the interest rate hike will slow it down even more.”

Ridle Markus, economist at Absa, commented: “This is in line with expectations. We do expect interest rates to have reached their peak, as tightening monetary policy further could have disastrous effects on medium-term growth prospects.

“However, the risks to still higher inflation and consequently interest rates remain in 2008.”

The increase is as expected, said Nicky Weimar, economist at Nedbank: “Every time inflation expectations rise above the target, the Reserve Bank reacts with a rate hike. We will have to study Mboweni’s statement to see if there are chances of another rate hike next year.”

In a departure from the norm, the Reserve Bank announced its decision on interest rates upfront on Thursday afternoon and then gave the reasons for its decision. In the past, the rates decision was announced at the conclusion of the MPC statement, with the reasons being cited first.

Photographers were barred from the news conference at which Mboweni was speaking. An official in the governor’s office confirmed Mboweni had instructed that news photographers not be allowed to attend the afternoon briefing on interest rates.

“I don’t want them to come here. At least that’s one thing I’m in charge of,” said Mboweni when asked about this exclusion, citing past behaviour by photographers as the reason for his decision.

Economists were largely expecting the Reserve Bank to raise interest rates, but warnings were being raised about a further potential hike in January.

Alwyn van der Merwe, director of investments at Sanlam Private Investments (SPI), said on Wednesday that he personally hoped another rate hike would not follow Thursday’s expected hike as this might be viewed as a policy error.

“The demand side is under pressure, and inflation is a lagging indicator. Another 50 basis points [on top of the Thursday hike] may affect economic growth on the demand side as well as the production side,” he pointed out.

Van der Merwe said GDP growth in the third quarter was driven by the services and construction sectors, while the rest of the economy was “feeling pressure”.

While the consensus forecast among the 13 economists surveyed by I-Net Bridge was for an increase in interest rates by 50 basis points, the majority also expected this to be the end of the tightening cycle.

At the moment, markets are factoring in about a 30% chance of another rate hike in January. Five of the 13 economists in the I-Net Bridge survey expected a hike in January next year, more or less in line with the market perception of this risk.