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News: SAs inflation outlook deteriorating

Tue, 16 Oct 07

The South African Reserve Bank’s Monetary Policy Committee (MPC) raised the repo rate for the third consecutive meeting,  announcing that the repo rate will be hiked by 50 basis points to 10,50%...

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 by Absa to remain above 6% and to peak in the first quarter of 2008 at an average of 6,8% before declining towards 6% in the following quarter. 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 5,9% in 2007, 5,8% and 5,6% in 2008 and 2009 respectively. These expectations are 0,5 percentage points higher than those measured in the second quarter. The MPC is concerned about the role these expectations play in wage and price-setting. The higher inflation expectations are also reflected in the wage trends.

A number of risks

According to Andrew Levy Employment Publications the average level of wage settlements for the first three quarters of 2007 was 7,2% compared with 6,4% during the corresponding period in 2006.

A number of risks were also mentioned that contributed to the deterioration in the inflation outlook, which include exogenous factors such as international oil and food prices. Household consumption expenditure, however, are showing signs of moderation, while the rand’s appreciation has also cushioned the negative impact of higher US$ oil prices.

The MPC described the rand as ‘resilient’ as its solid performance against major foreign currencies came on the back of capital inflows, weaker dollar, strong commodity prices and the favourable outlook for the SA economy.

On private sector credit extension, the MPC stated that it does not yet reflect the slowdown in household consumption, although ‘tentative signs of restraint are evident’.

No time to adjust

While the deterioration in the near-term inflation outlook is not unexpected, Absa says it is disappointed that the SARB did not give consumers enough time to adjust to previous rate hikes. The combined 350 basis point rate hike since mid-2006 and the impact of the NCA, which up to now remained uncertain, is likely to have a more damaging impact on spending than anticipated.

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

“Despite the latest blow to consumers’ budgets and the expected negative impact this may have on consumer confidence and spending, we remain upbeat about the economy’s ability to grow long-term. Nevertheless, we expect the economy to growth at a much lower level of around 4% in 2008, rebounding again in 2009

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