South African markets were expecting slightly more hawkish rhetoric by the South African Reserve Bank than transpired on Thursday and now feel inflation is fairly close to its peak. The bond market, especially at the previously sold-off short end, has reacted favourably.
Governor Tito Mboweni did preface the ultimate decision on Thursday, in which the bank’s monetary policy committee (MPC) raised the repo by 50 basis points to 11%, by saying “the balance of the risks to the inflation outlook continues to be on the upside”.
However, he also appeared to make a shift away from blaming the consumer as wholeheartedly as before when he said that there were some countervailing factors this time, and pointed to a marginal easing in household consumption expenditure and credit extension and lower vehicle sales.
He did add that credit was still high and quickly signalled that household debt to disposable income increased to 77,4% in the third quarter.
Virtually every other release in the current tightening cycle of 400 basis points, which began in June last year, had pointed a stern finger at the consumer, with Mboweni highlighting at regular intervals between the meetings how consumers are buying luxuries like “Hummers” and “DVDs” and not tightening their belts enough.
However, on Thursday he seemed to change course a little and mentioned more prominently the lagged effect of the hikes on the economy.
“Despite these risks and pressures, not all of the recent developments have been negative from an inflation perspective. In particular, there is evidence of a lagged response by the economy to the previous monetary policy tightening,” he said.
Notably, he also said that the MPC had discussed the potential for a pause and that the debate was “robust” within the committee. He said no one had requested an increase of 100 basis points, a thought some players in the market would have viewed negatively.
So is it fair to assume the rate-tightening cycle may be over?
Economists surveyed by I-Net Bridge think so, with eight of 13 respondents saying there probably wouldn’t be another hike in January when the MPC next meets.
Mboweni himself refused to be drawn into this debate and simply said in response to a question on the outlook for January: “The only thing on my mind now is to go on holiday and then think about it again in January.”
He did, however, note a slight worsening in the Reserve Bank’s inflation forecast, with the peak at 7,8% in the first quarter of next year and then a dip to below 6% only in the second half of the year. Previous forecasts were for the dip to take place earlier than that.
Some global analysts, however, feel that 8,5% consumer inflation could still be written in the tea leaves and herein lies the rub — the outlook for interest rates in 2008 will hinge quite dramatically on whether CPIX breaches 8%.
The January MPC decision will take place a day after the December CPIX reading, and this will no doubt be key early in the new year. — I-Net Bridge