The South African Reserve Bank’s Monetary Policy Committee (MPC) raised the repo rate for the fourth consecutive meeting, when it announced today that the repo rate will be hiked by 50 basis points to 11% on Friday, 7 December. Commercial banks are expected to hike the prime lending rate to 14,5% from 14% previously.

The MPC’s decision came after its central forecast indicated a deterioration in the inflation outlook in the near term. CPIX inflation is now expected to peak at 7,8% in the first quarter of 2008 before declining to below 6% by the end of the year. CPIX inflation is then projected to decline further to
around 5,2% by the end of 2009.

Inflation expectations, according to the BER’s survey, deteriorated to average 6% in 2007, up from 5,9% previously. In 2008 and 2009, expectations for average inflation is 5,9% and 5,6% respectively.

The MPC sees the main risk to inflation emanating from food, fuel and electricity price prospects. However, there is evidence that household spending and credit growth are moderating,
while income growth is also slowing down.

Commenting on the increase, Absa says, the SARB remains determined to fight inflation with tighter monetary policy despite the fact that higher interest may only have a muted impact on inflation.

“However, the decision comes against the background of continued strength in the economy with third quarter GDP data showing growth of 4,7% quarter-on-quarter annualised. Next week’s release of the Quarterly Bulletin will point to continued strong household spending during the quarter despite easing somewhat.

“However,” Absa notes, “the effect of the NCA and combined 400 basis point rate hike since mid-2006 is likely to have a more marked impact on spending in 2008.

Absa expects interest rates to have reached a peak as tightening monetary policy further could have disastrous effects on medium term growth prospects.

“ However, the risk to still higher inflation and consequently interest rates remain in 2008. Our estimates show that CPIX inflation is likely to peak above 8,5% in February 2008, before decelerating to dip within the target range in the second half of the year. Despite the latest blow to consumers, lively fixed capital formation is likely to continue, thereby underpinning the economic expansion.

“We expect real economic growth of around 4% in 2008 following estimated growth of around 5% in 2007.”
* The next MPC meeting is on 30-31 January 2008