IEASA National - News

SA Reserve Bank increases repo rate by 50basis points   Article Date :16 Oct 2006 Effective from October 13 The South African Reserve Bank’s Monetary Policy Committee (MPC) today increased the repo rate at its bi-monthly meeting by another 50 basis points with effect from October 13, bringing the total increase since June to 150bp. The latest increase, according to Absa, takes the repo rate to 8,5% from 8% and was in line with market consensus expectations (as surveyed by I-net). Following this hike, commercial banks will follow suit, hiking rates by a similar margin to take the prime lending rate from 11,5% to 12%. The MPC warned that the risk to inflation is on the upside, but generally, the latest statement is much more upbeat on the inflation prospects than any of the MPC statements since June. The MPC stated that significant upside risk to inflation remains. These risks include the brisk pace of growth in domestic final demand, increased credit extension to the private sector, brisk growth in money supply and rising food prices. The weaker rand, which depreciated by 22% since May on a trade-weighted basis, might pose a further risk to the inflation outlook and could result in some pass-through effects on prices of goods and services. The MPC stated that the challenge for monetary policy is to ensure that this impact is minimised. The risk posed by the large current account deficit also received special mention although the Governor noted that this deficit continues to be reasonably well financed. On the positive side, the lower international oil prices and positive labour market developments do not appear to pose a risk at present although these indicators can move up at any time. According to the SARB, inflation is likely to continue its upward trend, moving towards the upper end of the inflation target band. Inflation is expected to hover around the six percent level between the second and third quarter of 2007 after which it is expected to moderate. CPIX inflation is projected to reach around 5,4% by the end of the forecast period in the final quarter of 2007. The SARB remains confident that during the forecast period, inflation will remain within the target band. Inflation expectations have been showing an upward trend with the BER inflation expectations survey showing an increase in expectations of 0,5% in 2006 to 4,9%, rising by 0,4% in 2007 to 5,3%. Inflation is then expected to ease to 5% in 2008.The MPC stated that the inflation risk remains on the upside and promised to remain vigilant against longer term inflation threats in order to contain inflationary pressures and keep CPIX inflation within the inflation target range. In contrast to the SARB’s macroeconomic model, Absa’s projections show that CPIX inflation will breach the six percent level early in 2007 and remain above this level for the rest of the year. Given these projections, we anticipate another 50bp hike before year-end, while further rate hikes in early 2007 are projected. CLICK HERE TO RETURN TO THE MAIN NEWS PAGE