From Business Day
October 18 2007
By Mariam Isa
PEOPLE who think interest rates will not rise again may be disappointed.
Record gains in oil prices have cast a cloud over the inflation outlook, and if that deteriorates during the next few months, another hike in lending rates could be on the cards.
“I think there is still a chance of a rate hike, based on the inflation outlook — it’s still a worry,” said JPMorgan economist Tebogo Dintwe.
“We expect inflation to peak above 7% in the first quarter of next year. If it does ... and if the Bank shares this view ... it will be difficult to convince markets that monetary policy should pause,” said Dintwe.
The Reserve Bank has already raised lending rates 3,5 percentage points since June last year in a bid to curb inflation, which has breached its 3%-6% target for five months in a row.
The most recent hike last week took markets by surprise, driving the prime lending rate set by banks to 13,5% — which was a four-year high.
That increase was driven mainly by upward revisions to the Bank’s forecasts for inflation, which it said would peak at an average of 6,8% in the first quarter next year, up from a 6,3% estimate at its August policy meeting.
Inflation climbed by a four-year record of 6,5% in July, before subsiding to 6,3% in August, but the respite will be short lived, according to both independent and official forecasts.
Changes in interest rates take one to two years to make themselves fully felt, and the prevailing view is that the Bank will hold them steady for a while to assess their effect on the economy.
Yet the Bank has made it very clear that the risks to its inflation outlook — which stem mainly from rising oil and food prices — remain on the “upside”, and it will not hesitate to raise rates again if it thinks this is justified.
“Our job as a responsible central bank is to ... bring inflation back inside its target range ... it will be inside ... by the second half of next year,” governor Tito Mboweni said earlier this week.
Some analysts and trade unions have taken the Bank to task for raising interest rates to fight forces beyond its control, saying that this unfairly punishes the economy, and the consumers.
However, Mboweni said at the Rand Club in Johannesburg this week that even excluding food and fuel, inflation “was still trending higher and very strongly so” with “second-round effects taking root” in the economy.
That was a reference to rising wages, service costs, and prices for other goods affected by food and fuel.
It also means that in terms of monetary policy, there is probably no way out if inflation continues to climb.
“If you look at the monetary policy statement and the governor’s comments there is enough to suggest that the Bank is looking at things very closely,” said Razia Khan, Standard Chartered’s regional head of research for Africa.
The outcome of the Bank’s next monetary policy meeting in December was going to be another “very close call”, she said.
In a worrying development this week, oil prices scaled new record highs, with Brent crude nudging above $84 a barrel, against $78 when the Bank’s policy committee met last week.
That is worrying, as petrol accounts for more than 5% of the weight in the products which comprise CPIX, the inflation index targeted for interest rates.
Gains in the rand prompted by last week’s rate hike will help, but will offset only some of the inflationary effect of higher domestic fuel prices, which have already climbed 17,2% so far this year.
“With oil prices at historic highs and likely to trend higher, the chances are that we will have a fuel price hike next month,” said Brait economist Colen Garrow. “That will weigh on inflation and interest rate expectations.”
In its monetary policy statement last week, the Bank acknowledged there were “some signs” that the economy was responding to higher interest rates.
Yet figures released yesterday did little to back the view that consumer spending has slowed enough to significantly curb economic growth, which might persuade the Bank not to lift rates.
Retail sales rose 6,9% in the year to August, quickening from an upwardly revised 5,2% in July and showing that demand was still resilient in the face of both higher interest rates and stricter lending rules introduced in June.
That backs the message sent by growth in credit, which is still too fast for comfort, and buoyant consumer confidence surveys.
“Unless we see clear signs that the economy is slowing, and consumption in particular, the Reserve Bank will remain hawkish in its tone and perhaps, hawkish in its action,” said Absa Capital chief economist Jeff Gable.
“I think in general the Bank would rather not increase rates further but ... if the inflation message deteriorates significantly they will be in a difficult position and may have to do so,” he said.
Inflation expectations are another thorny issue for the Bank, after rising strongly in the third quarter. That is one area which will react to higher interest rates.
“If the Bank lifts rates again it will be due to both the inflation outlook and its credibility as an inflation fighter,” Dintwe said.
Arguments that the Bank will not raise rates in December — a bumper month for retailers — don’t hold water, as that is exactly what it did last year.