Interest rate hike looming for SA – economist

“With inflation having deteriorated remarkably over the last few months, I believe the Reserve Bank will continue with its inflation targeting, raising interest rates a few times in the future,” explained economist George Glynos from Econometrix Treasury Management (ETM), Wednesday, 26 March 2008.

Consumer Price Inflation excluding interest rates on mortgage bonds (CPIX) for February came in at 9.4% year-on-year (y/y), up 0.6 of a percentage point on January's 8.8% y/y, reported Statistics South Africa (Stats SA), Wednesday.

Rising food, transport, housing, medical care and health expenses, education, fuel and power costs contributed to the rising inflation figure said Stats SA.

Speaking to BuaNews, Glynos explained that the mandate of the Reserve Bank, unlike that of the United States Federal Reserve Bank, is explicitly to target inflation.

Economic balancing act

The Federal Bank has a dual mandate to juggle between inflation targeting and economic growth.

Therefore, in the wake of a collapsing housing market in that country, the bank cut interest rates from 4.25% to 3.5% in January 2008, in an effort to keep the US economy from collapse.

South Africa's highest ever inflation figure was 25.5% in 1998 brought on by the emerging market crisis, said Glynos who added that South Africa's Rand also took a massive tumble in 2001 as global markets cringed following the terrorist attacks on the World Trade Centre.

In the last months of 2001, South Africa's Rand fell to levels of over R13 to the dollar, finally dropping to R13.85 in December 2001.

Peaking inflation

Inflation, said Glynos, is expected to peak in the 10% region by September of this year, and will hopefully follow a gradual decline back towards the 3 and 6% target band set by the Reserve Bank by quarter two of 2009.

February's CPIX figure is the 11th breach of the Reserve Banks inflation target band.

Further fuelling inflationary pressures, the Rand has dropped about 20% on a trade-weighted basis.

According to the recent research conducted by ETM, Glynos highlighted that for every 10% drop in the Rand, CPIX needed to be revised by 1% 9 months down the line.

“With the Rand having dropped 20%, we are effectively looking at a 2% change in 9 months,” he said.

Reserve Bank independence

Commenting on Parliament's remarks recently to play a greater oversight role in the inflation targeting decisions of the Reserve Bank, Glynos said that he was against any interventionist type policies from government.

“The Reserve Bank needs to remain completely independent of government.

“Government gave them [the Reserve Bank] a mandate to control inflation and they must be left to do their job, while government focuses on issues of macroeconomic policy.

“Once government is allowed to interfere in the affairs of the Bank, there will simply be no clarity on inflation decisions - whether they were made for economic of political reasons,” said Glynos.

D-Day

The Monetary Policy Committee will be announcing its decision on an interest rate increase on 10 April 2008.

The repo rate currently stands at 11% following the committee's decision to keep the interest rate unchanged when they last met at the end of January 2008.

Article published courtesy of BuaNews