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Mboweni hints at pre-Christmas rate hike

15 November 2006

South Africa’s central bank will remain resolute to keep inflation under control, and not hesitate to change monetary policy before Christmas if necessary, Governor Tito Mboweni said on Tuesday, signalling another rate hike.  

The Reserve Bank has already raised its repo rate by 150 basis points since June to curb inflationary pressures, and most analysts expect more increases ahead.  

“If in the view of the monetary policy committee the inflation target is being threatened by inflationary pressures then the MPC will have the courage of its conviction to do the correct thing, even as we enter the festive period,” Mboweni said in a speech published on the bank’s Web site.  

“It is worth stating here that there is no rule that we are aware of which prohibits changes to the monetary policy stance just before Christmas,’ he said.  

The central bank’s monetary policy committee, or MPC, meets again on December 6-7 and is widely expected to hike rates another 50 basis points to 9.0 percent as targeted inflation edges up towards the upper end of the inflation band.  

The CPIX inflation measure has remained within the 3-6 percent target range for three years but is forecast to possibly breach six percent in early 2007.  

The benign inflationary environment over the past few years, and the subsequent easing of monetary policy, spurred a spending boom that has pushed credit and household debt levels to all-time highs. Interest rates were at two-decade lows before the June rate hike.  

“Unfortunately this (low inflation) has led us to provide a much more accommodative monetary policy stance, which has had some unintended consequences,” Mboweni said at a charity dinner.  

TIGHTEN BELTS  

Mboweni warned that the bank was resolute about implementing its mandate of keeping inflation within the target range and was keeping a close eye on inflation developments.  

The Reserve Bank warned last week that a weaker rand currency and high consumer spending were the main risks to the inflation outlook.  

Analysts said the hawkish tone of Mboweni’s comments cemented the case for another interest rate Nice.  

“I don’t think anyone will be very surprised by the hawkish tone to the rhetoric,” said Lucy Bethell, an analyst at the Royal Bank of Scotland in London. “At this present point the central bank does not have an incentive to sound more dovish.”  

A three-year spending boom has driven household debt to almost 70 percent of disposable income while the rand has weakened about 13 percent against the dollar so far this year, knocked in part by a current account gap of more than 6 percent of gross domestic product.  

But the rand has clawed back some ground after stumbling to 3-1/4-year lows in October, buoyed in part by perky commodity prices and positive emerging market sentiment.  

“You could say that inflation pressures have subsided because the currency is a bit stronger than it was in the middle of October and also oil prices are low, which helps improve the inflation outlook but I think they still need to hike rates,” Bethell said.  

Mboweni said consumers should heed the message to curb spending, even as they prepared for the spending spree that usually precedes Christmas.  

“Once again our message is that we should all try to tighten our belts no matter how wide or narrow our waistlines might be,” he said.  

Mboweni added that the central bank was keen to play its part in lifting economic growth to higher levels in South Africa and could only do this by keeping inflation low.  

“Economic development cannot take place in a high-inflation environment. ... Inflation is not good for the working class and it eats into the little savings of the ordinary people,” he said.  
(Moneyweb, 15 Nov 2006)

Source: Nedbank Property Talk