One of the most decisive rates meetings yet of the South African Reserve Bank’s monetary policy committee (MPC) began on Wednesday morning with “no hitches”, according to a bank spokesperson.
“Everything is on track,” she said.
The meeting will end after lunchtime on Thursday, with the final decision announced live to the public just after 3pm.
In line with new bank policy, the repo-rate decision will be read first as opposed to at the end of the statement.
On January 31, the MPC decided to pause its current tightening cycle at 11%, which was in line with what the market expected at the time.
The prime overdraft rate thereby remained at 14,5% and the current tightening cycle, which began in June 2006, at 400 basis points.
However, surging inflation at 9,4% and proposed electricity increases well above previous estimates have raised serious concerns that there are risks of an increase this time around.
The consensus is for an unchanged South African repo rate at 11%, according to I-Net’s Econometer; however, it was a fairly close call as of the nine leading local economists surveyed, four expected an increase of 50 basis points.
International analysts also appear divided on the outcome.
Global analysts Lehman Brothers said they expect a 50-basis-point increase despite slower credit demand, but Moody’s Economy.com said they feel growing global and domestic economic problems may keep the bank sidelined.
The majority of the economists surveyed (five) did not expect further hikes after the unchanged decision, while three who were expecting a 50-basis-point hike also felt it would be the end of the cycle after that hike.
Only one economist in the survey thus saw a 50-basis-point increase on Thursday and then further increases in either June or August.
A number of economists added that the next move would be a decrease in rates, with timelines varying between the fourth quarter 2008, October 2008, December 2008, February 2009 and June 2009.
An independent analyst spoken to separately said that the outcome may only be determined based on the rand’s movements.
He said that if the rand can stay below R8 to the dollar, then there will be no need to raise rates, but if it moves back above R8 then the bank may be tempted to hike by as much as 100 basis points as the trade-weighted rand struck its weakest level since October 2002 last month.
“A 50-basis-point hike no longer cuts it if the purpose is to lower inflation expectations and producer pricing behaviour,” he said.
The rand has remained well below R8 to the dollar so far this week.
A key change expected in the current announcement will be to the Reserve Bank’s inflation outlook.
The Bureau for Economic Research, whose analysis is often referred to by the bank, is due to release its first-quarter 2008 inflation expectations at about 3pm on Thursday.
During the meeting in January, Reserve Bank Governor Tito Mboweni highlighted oil, food and electricity prices, but added that some moderation in the first two was being noted in the bank’s equations. However, he pointed to concerns regarding the effects of Eskom’s 14,2% price increase on the overall CPIX data.
Now that Eskom is seeking a 100% increase, this issue will likely come up again. Higher oil prices at $106 per barrel should also be noted.
At the time Mboweni said that the economy had continued to respond to the tighter monetary policy stance and inflation was expected to peak in the first quarter of 2008 at an average of about 8,5%. It is now very likely this expectation will have to be revised upwards.
The repo rose as high as 13,5% in September 2002, before receding to 7% in April 2005, with the current tightening cycle then beginning in June 2006. The MPC hiked by 50 basis points in December 2007. — I-Net Bridge