/ 10 April 2008

Mboweni delivers the bad news

South African Reserve Bank Governor Tito Mboweni has raised the repo rate, at which the South African Reserve Bank lends money to banks, by 50 basis points to 11,5% following a two-day meeting of the bank’s monetary policy committee.

The prime overdraft rate therefore increases to 15% and the tightening cycle that began in June 2006 has now reached 450 basis points.

“The South African economy continues to respond to the less accommodative monetary policy stance. Domestic expenditure is responding to our current policy settings. Various high frequency and survey data point to the economy growing at a rate below potential, but nevertheless underpinned to some extent by strong investment expenditure by the private sector and public corporations,” said Mboweni at a press conference in Pretoria.

“The inflation outlook is being influenced by a series of supply-side shocks emanating from the international oil and food prices which are posing challenges for inflation-targeting countries in general.

“Domestically, there is evidence of generalised price pressures, and the prospect of further substantial electricity price increases will also delay the return to within the inflation target range. In the light of these developments, inflation expectations have deteriorated.”

The most recent central forecast of the Reserve Bank indicates a further deterioration in the inflation outlook when compared with the previous forecast, said Mboweni. Inflation is now expected to peak at an average of about 9,3% in the first quarter of this year, and thereafter to follow a downward trajectory.

It is expected to return to within the bank’s inflation target range of 3% to 6% by the fourth quarter of 2009.

CPIX inflation had surged through the top end of the bank’s 3%-to-6% band and hit a high of 9,4% year-on-year in February.

‘Inflation concerns won’

Nicky Weimar, economist at Nedbank, commented: “We still feel there were enough reasons not to hike, but inflation concerns won at the end of the day. It will be interesting to see how the rand reacts to this news.

“Our view is that this is one last effort to stamp out inflation. We don’t believe there would be any more interest-rates hikes.”

Mike Schussler, economist at T-Sec, said: “The 50-basis-point increase is what I expected. The increase is not good for growth, but it sends the right message that we are still fighting inflation.”

He added: “While it is bad for short-term rates, it may good for rates in the longer term … longer-term rates may come down, since people are more likely to tighten their belts.”

ETM market analyst Russell Lamberti felt that Mboweni “had very little choice but to do what he did. They are clearly concerned about the current rate environment.

“What we probably will see, and we are already starting to see now in the fixed income market, is that investors are starting to push out their expectations of when this cycle is going to peak.

“After what we heard today, I am still expecting another rate hike in June or August, given the way Mboweni was talking how the bank has reacted to the electricity price increases, and how we can see inflation into double digits. I won’t be surprised to see another hike in June.”

Economists had said earlier on Thursday that there was an increased likelihood that the bank would increase interest rates, as inflation expectations had deteriorated further since its last meeting.

At the end of January, South Africans had received a slight inflation breather when the repo rate was left unchanged at 11%.

According to a survey of leading economists by I-Net Bridge, the consensus this time around was for an unchanged repo rate at 11%. However, it was a fairly close call as of the nine leading local economists surveyed, four expected an increase of 50 basis points.

Last month, Mboweni had warned consumers to tighten their belts further as higher food and fuel prices fanned out into wider inflation. He told Parliament’s finance committee at the time that there was evidence that prices pressures are not confined to food and energy.

“Taking out food and energy prices, we still see the trend is on the upside, meaning that we are experiencing some second-round effects arising out of food and energy,” he said. “So we have a very difficult time ahead of us. We have to tighten our belts.”