Mariam Isa
13 June 2008
Johannesburg — RESERVE Bank Governor Tito Mboweni left market analysts gasping in dismay and anger yesterday when he pulled a 50-basis-point interest rate hike out of the hat - confounding experts who had taken seriously his earlier threat of a 'drastic' hike of up to 200 points.
Employing strong language such as "prank" and "bait and switch" tactics to describe Mboweni's volte-face, they said his actions threatened to undermine both his credibility and that of the Bank.
To his credit, however, Mboweni appears to have taken cognisance of strident calls for an interest rate announcement that acknowledged the marked slowdown of SA's economy, and the debilitating effects of rising fuel and food prices on SA's economic growth outlook.
In a televised address, Mboweni unveiled a dramatic deterioration in SA's inflation outlook, with his raising interest rates by just half a percentage point reflecting growing concern about the economy.
However, markets were stunned by the decision to raise the repo rate to 12% after a stream of "hawkish" rhetoric in the past few weeks, which had suggested an increase to 12,5% was on the cards.
Analysts reacted strongly to the more "conservative" hike.
"There's disbelief, confusion and anger," said a top analyst who asked not to be named.
"The market is unlikely to be amused by Mboweni's 'bait and switch' antics, IDEAglobal emerging markets economist, Alvise Marino said. "We are not impressed with Mboweni's "prank" on the market.
"Especially at a time when growth is subsiding and the country is plagued by problems such as power shortages and violence -- not to mention a wide current account deficit and a massive inflation problem -- investors will not be pleased with such erratic central bank rhetoric, and are likely to show further wariness of investing in SA ," Marino said.
Mboweni said the 50-basis-point hike was in "light of the further deterioration in the inflation outlook, but mindful that the economy is responding to a less accommodative monetary policy stance".
The increase was the 10th in two years, and took prime lending rates set by commercial banks to 15,5% -- their highest in five years.
Business Unity SA welcomed the smaller than expected rate hike, but warned any further increases could seriously erode jobs and growth.
The rand, however, slid 1,4% to a near two-month low at R8,14 to the dollar in response to the news. Lower interest rates reduce its "yield appeal" to investors. Banking shares rallied, clawing back some of hefty losses this year prompted by the higher cost of borrowing.
Many analysts warned that the Bank's credibility would be undermined by the fact that officials did nothing to dissuade speculation of a bigger rate hike, after Mboweni suggested two weeks ago that a two percentage point hike was possible given spreading price pressures.
"While there is a measured response to evidence the economy is slowing, it is going to be a huge negative for the rand given market expectations for a much more aggressive move," Standard Chartered's regional research head for Africa, Razia Khan said.
"They created the expectation of a 100 basis point rate hike, and then did nothing to guide markets properly -- the fault is in the communication of their intentions,"
Absa Capital Research head Jeff Gable described the statement from the Bank's monetary policy committee as "nothing short of dramatic", saying it gave them "a bit of breathing room" ahead of the next scheduled meeting in August.
Bonds eked out modest gains, with markets convinced that interest rates will continue to climb this year -- albeit more slowly than anticipated. Mboweni said the Bank had been bombarded with 5000 letters begging it not to raise interest rates again. This was unprecedented.
He said the inflation outlook remained bleak in an environment of sustained increases in global oil and food prices.
"Domestically, price increases have become more broad-based, and inflation expectations have deteriorated further."
He predicted that inflation, measured by the annual rise in CPIX, will climb to 12% in the third quarter -- above its previous record of 11,3% -- and only return to its 3%-6% target range by the third quarter of 2010.
That compares with the Bank's forecast last month that the index, which excludes mortgage costs, will peak at 9,3% in the first quarter of this year, and be inside its target by the end of next year. The CPIX gauge climbed by 10,4% in April and has breached its target for 13 successive months . Mboweni said the Bank's latest forecasts excluded any increase in the 14,2% electricity price hike granted to power utility Eskom.
Mboweni Calls It Right [editorial]
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