Pretoria — The South African Reserve Bank (SARB) is likely to hike the repo rate by 50 basis points to 10 percent, amid unstable global market conditions, spurred on by a liquidity crisis in the United States.

The credit crisis in the US subprime mortgage market resulted in a squeeze in corporate debt globally last month, and a full-blown liquidity crisis this week.

Speaking to BuaNews on Monday, Director at the Bureau for Economic Research (BER) Professor Benjamin Smit, said in the advent of increasing debt, central banks such as the SARB, normally hiked interest rates.

According to a JPMorgan Global Data Watch report released last week, the New York financial institution warned US financial market problems have intensified dramatically over the past few days prompting damaging spin-offs for the global market.

Huge credit extension by financial institutions in the US coupled with interest rates as low as 1 percent, led to many US homeowners living beyond their means. With the recent tightening of credit conditions and revaluation of risk, the US market has been hit by severe liquidity problems.

Similarly, South Africans have been forced to cut back on their credit spending, since the repo rate was hiked four times by 200 basis points in 2006.

The rate was then kept stable in April 2007, but hiked once more by 50 basis points to 9.5 percent in June. The beginning of that month also saw the introduction of the National Credit Act, which amongst others, tightened legislation on credit extension.

In response to the liquidity crisis, the US Federal Reserve, and other central banks across the world have injected billions into banking systems to avert immediate catastrophe.

The liquidity crisis, however, had made the Federal Reserve more inclined to maintain the current rate of 5.25 percent, as lowering interest rates would have costly long-term implications for the economy.

Mr Smit said central banks across the world will be likely to freeze interest rates in the short-term to deal with the current crisis.

He added, however, that whilst "there is pressure on the South African Reserve Bank (SARB) not to raise the repo rate," it is likely they will continue with the implementation of a 50 basis point increase at Thursday's Monetary Policy Committee (MPC) meeting.

Economist at BER Christelle Grobler, agreeing with Mr Smit, told BuaNews, "It is the official BER forecast that [despite global market volatility] there will be a 50 basis point increase on Thursday."

Economic research done by JPMorgan points out that rising core inflation is as a result of higher food and energy prices, adding higher than previously anticipated wage settlements is further fuelling inflationary pressure.

Locally, the effects of escalating food and fuel costs may also contribute to an increase in the repo rate.

According to figures released by Statistics South Africa in July, the annual increase of 6.4 percent in the CPIX, was mainly due to rising food, transport, medical care and fuel and power costs.

The CPIX is the annual percentage change in the CPI excluding bond interest rates, for the historical metropolitan and other urban areas.

In addition, the JPMorgan research report indicated: "Beyond the widely anticipated 50 basis point rate hike, we now expect the SARB to raise rates a further 50 basis points in October [2007], bringing the repo rate to 10.5 percent."

If the MPC hikes the repo rate by another half a percent in October, the Bank will have raised the repo rate by over 300 basis points since June 2006.

Last week, economists witnessed crude oil prices drop below the $70 per barrel mark, the lowest following record highs recently of close to $80 per barrel.

The lower oil price, in conjunction with the rand remaining steady against the dollar, has led economists to believe another fuel price cut is on the cards.

"Obviously with the current volatility in the market, things might change, but if we continue with an over recovery, they have to be transparent and give it back to the consumer," said Ms Grobler.

She said economic indicators were currently forecasting a 27 cent drop in the fuel price, but "bearing in mind the volatility, let's say it [the decrease] will be around 20 cents early next month."

Absa Economist Chris Hart told BuaNews on Friday: "We'll probably see a fuel price cut at the beginning of September of between 20 to 30 cents. We could finally see the price of fuel go below the R7 a litre mark."

With regard to the country's inflation falling back within the SARB's inflation target band of 3 to 6 percent, Ms Grobler said official BER forecasts indicated inflation would only fall under the 6 percent target ceiling by 0.3 a percentage point by the second quarter (April) of next year.