Rates set to increase

EAST LONDON – Above-target inflation meant that South Africa’s interest rates were more likely to rise than fall, central bank Governor Tito Mboweni said yesterday.

The central bank’s Monetary Policy Committee Meeting (MPC) meets on August 15-16 at a time when inflation has remained about its three to six per cent target for three months. Higher food and fuel prices helped push inflation to 6,4 per cent year-on-year in June, prompting the MPC to increase interest rates by 50 basis points to 9,5 per cent, adding to a 200 basis points rise from June 2006.”I don’t know what the members of the MPC are going to decide next week, but I think it is more likely that they are not going to cut interest rates, and more likely they might increase,” Mboweni said at a breakfast meeting in East London.He said household debt levels in South Africa were too high at 76 per cent of disposable income and debt service costs were rising in step with higher interest rates.Mboweni said higher rates could result in insolvencies and car repossessions, and he urged consumers to start living within their means.A new law introduced on June 1 to curb indebtedness did not have any impact on credit demand in June, which stayed high at 24,92 per cent year-on-year while the main gauge of consumer spending was faster at nine per cent year-on-year in May.Analysts said the resilient retail sales suggested that the 2,5 percentage points rate rise may not have had the desired effect yet.Mboweni has repeatedly warned consumers against overspending and said last week there was no other instrument to tame inflation except rates.EXPORTS DRAG ON CURRENT ACCOUNT Consumers have relied heavily on imports to feed their appetite for goods, putting pressure on the current account deficit, which narrowed marginally to 7,0 per cent of gross domestic product in the first quarter.Mboweni said manufacturing, the second-largest economic sector, still trailed mining in exports.Manufacturing contributes nearly 17 per cent to the country’s economy.”We are still relying predominantly on mining for exports, meaning that exports of manufacturing is lousy.That would explain quite clearly why we still have such a large current account deficit.”Mining exports make up 55,5 per cent of total exports while manufacturing exports are 32,3 per cent.South African exports have been hit by the firmer rand currency which has rebounded from a 3-1/4 year low of 7,98/US$ reached in October to trade around 7,06 currently, about 0,7 per cent softer so far this year.”Manufacturing is not performing as good as it should be compared to mining, so we have a problem there,” Mboweni said.The trade deficit for June widened to 5,31 billion rand, from 2,67 billion rand in May as exports faltered, decreasing by three per cent in the month, while imports increased by the same margin.The International Monetary Fund said in its annual country report released on Monday that South Africa’s wide current account gap contributed to the country’s vulnerability to external shocks.The reserve bank has said that the current account has been comfortably financed by portfolio inflows.Nampa-ReutersHigher food and fuel prices helped push inflation to 6,4 per cent year-on-year in June, prompting the MPC to increase interest rates by 50 basis points to 9,5 per cent, adding to a 200 basis points rise from June 2006.”I don’t know what the members of the MPC are going to decide next week, but I think it is more likely that they are not going to cut interest rates, and more likely they might increase,” Mboweni said at a breakfast meeting in East London.He said household debt levels in South Africa were too high at 76 per cent of disposable income and debt service costs were rising in step with higher interest rates.Mboweni said higher rates could result in insolvencies and car repossessions, and he urged consumers to start living within their means.A new law introduced on June 1 to curb indebtedness did not have any impact on credit demand in June, which stayed high at 24,92 per cent year-on-year while the main gauge of consumer spending was faster at nine per cent year-on-year in May.Analysts said the resilient retail sales suggested that the 2,5 percentage points rate rise may not have had the desired effect yet.Mboweni has repeatedly warned consumers against overspending and said last week there was no other instrument to tame inflation except rates.EXPORTS DRAG ON CURRENT ACCOUNT Consumers have relied heavily on imports to feed their appetite for goods, putting pressure on the current account deficit, which narrowed marginally to 7,0 per cent of gross domestic product in the first quarter.Mboweni said manufacturing, the second-largest economic sector, still trailed mining in exports.Manufacturing contributes nearly 17 per cent to the country’s economy.”We are still relying predominantly on mining for exports, meaning that exports of manufacturing is lousy.That would explain quite clearly why we still have such a large current account deficit.”Mining exports make up 55,5 per cent of total exports while manufacturing exports are 32,3 per cent.South African exports have been hit by the firmer rand currency which has rebounded from a 3-1/4 year low of 7,98/US$ reached in October to trade around 7,06 currently, about 0,7 per cent softer so far this year.”Manufacturing is not performing as good as it should be compared to mining, so we have a problem there,” Mboweni said.The trade deficit for June widened to 5,31 billion rand, from 2,67 billion rand in May as exports faltered, decreasing by three per cent in the month, while imports increased by the same margin.The International Monetary Fund said in its annual country report released on Monday that South Africa’s wide current account gap contributed to the country’s vulnerability to external shocks.The reserve bank has said that the current account has been comfortably financed by portfolio inflows.Nampa-Reuters