Rate rise may be step too far

JOHANNESBURG – South Africa’s central bank could have over-reacted in raising interest rates once more on Thursday, and might be focusing too much on inflation targeting at the expense of economic growth, analysts said.

The bank raised its key repo rate at which it lends to commercial banks by 50 basis points to 10,5 per cent, citing a deteriorated inflation outlook. It is the third increase this year.The latest increase means interest rates have gone up by an accumulative 350 basis points since June 2006 as the central bank strives to tame inflation, which has stayed stubbornly above a three to six per cent target range since April.South Africa Reserve Bank Governor Tito Mboweni told a news conference on Thursday that underlying inflationary pressures remained evident, and the outlook had deteriorated modestly.Mboweni said the main CPIX consumer inflation measure should peak at 6,8 per cent in the first quarter of next year, but that the bank’s monetary policy committee was determined to bring it back within the target band.But Elize Kruger, economist at Kagiso Securities, said the rates decision did not take into account that inflation generally responds to monetary policy changes with a 12-18 month time.OUTSIDE FACTORS Kruger noted that the main drivers of the upward trend in the CPIX gauge were exogenous factors, mainly food and fuel prices, which the central bank had no control over and which “could potentially keep inflation out of the target band for longer, no matter what the SARB does”.”Still they decided to hike rates, knowing it will have no impact on the short-term outcome of inflation.The SARB likes to talk about a forward-looking monetary policy approach, but they react only on the expectations about inflation in the next 6 months,” she said.”What I think is likely to happen (is) an economic slowdown that will gain momentum in 2008.”South Africa’s economic growth slowed to an annualised 4,5 per cent in the second quarter of 2007 from 4,7 per cent in the first quarter and five per cent the whole of last year, weighed down mostly by poor manufacturing expansion and higher rates.Moody’s Economy.com said in a note that while data earlier this week showed improved year-on-year growth of 5,1 per cent in August for manufacturing – the country’s second largest sector – output of consumer goods should remain under pressure in coming months as punitive rates crimped spending.Citi economist Jean-Francois Mercier said the October rate increase would probably be the last in the current cycle, and that it appeared to be more of an “insurance” against upside risks to inflation than a necessary move to prevent economic overheating.”Monetary policy certainly is not stimulative any more, and after today’s move, real interest rates are probably even in restrictive territory,” he said, speaking on Thursday.”GDP growth is unlikely to exceed 4,5 per cent in 2008, and may even fall below in coming quarters.The next move in …policy rates thus looks more likely to be a cut, and we think it could happen around mid-2008.”In an editorial headlined “A poor rates call” the country’s leading business newspaper, Business Day, suggested the central bank failed to take account of the views of the business sector in making its decision.”More likely …we will be stuck with an economy that runs out of momentum just when it most needs it,” Business Day said.Nampa-ReutersIt is the third increase this year.The latest increase means interest rates have gone up by an accumulative 350 basis points since June 2006 as the central bank strives to tame inflation, which has stayed stubbornly above a three to six per cent target range since April.South Africa Reserve Bank Governor Tito Mboweni told a news conference on Thursday that underlying inflationary pressures remained evident, and the outlook had deteriorated modestly.Mboweni said the main CPIX consumer inflation measure should peak at 6,8 per cent in the first quarter of next year, but that the bank’s monetary policy committee was determined to bring it back within the target band.But Elize Kruger, economist at Kagiso Securities, said the rates decision did not take into account that inflation generally responds to monetary policy changes with a 12-18 month time.OUTSIDE FACTORS Kruger noted that the main drivers of the upward trend in the CPIX gauge were exogenous factors, mainly food and fuel prices, which the central bank had no control over and which “could potentially keep inflation out of the target band for longer, no matter what the SARB does”.”Still they decided to hike rates, knowing it will have no impact on the short-term outcome of inflation.The SARB likes to talk about a forward-looking monetary policy approach, but they react only on the expectations about inflation in the next 6 months,” she said.”What I think is likely to happen (is) an economic slowdown that will gain momentum in 2008.”South Africa’s economic growth slowed to an annualised 4,5 per cent in the second quarter of 2007 from 4,7 per cent in the first quarter and five per cent the whole of last year, weighed down mostly by poor manufacturing expansion and higher rates.Moody’s Economy.com said in a note that while data earlier this week showed improved year-on-year growth of 5,1 per cent in August for manufacturing – the country’s second largest sector – output of consumer goods should remain under pressure in coming months as punitive rates crimped spending.Citi economist Jean-Francois Mercier said the October rate increase would probably be the last in the current cycle, and that it appeared to be more of an “insurance” against upside risks to inflation than a necessary move to prevent economic overheating.”Monetary policy certainly is not stimulative any more, and after today’s move, real interest rates are probably even in restrictive territory,” he said, speaking on Thursday.”GDP growth is unlikely to exceed 4,5 per cent in 2008, and may even fall below in coming quarters.The next move in …policy rates thus looks more likely to be a cut, and we think it could happen around mid-2008.”In an editorial headlined “A poor rates call” the country’s leading business newspaper, Business Day, suggested the central bank failed to take account of the views of the business sector in making its decision.”More likely …we will be stuck with an economy that runs out of momentum just when it most needs it,” Business Day said.Nampa-Reuters