Cape Town — South Africa's central bank today hiked interest rates for the fourth time in six months, increasing the rate at which it lends money to commercial banks to nine percent per annum.
In a decision of central importance to the South African economy, the governor of the South African Reserve Bank, Tito Mboweni, announced in Pretoria that the bank's repurchase, or "repo," rate would be increased by 50 basis points, from its current level of 8.5 percent, on Friday December 8.
The bank's monetary policy committee (MPC) has decided on a similar increase at every meeting since the middle of this year, taking the rate up from 7 percent since June.
The principal objective driving the committee's decisions is to keep South Africa's annual inflation rate at between three and six percent. Through adjustments to the repo rate, it exerts powerful pressure on the interest rates charged by commercial banks to lenders.
By pushing up interest rates in recent months, the committee has made it more expensive to borrow money, combating inflation by restricting the growth in the money supply.
Mboweni said today that although inflation as measured by the CPIX - the consumer price index for metropolitan and other urban areas, excluding the interest cost on mortgage bonds - was running at five per cent in October, this was higher than expected.
"Although expectations for all forecast years are within the inflation target range," he said, "the upward trend in expectations observed over the past two quarters is a source of some concern to the MPC." Bank forecasts were that CPIX was expected to exceed six percent in the second quarter of next year, and to average 5.4 percent in 2007 and in 2008.
Despite a drop in petrol prices in October, food price inflation was running at 9.4 percent. Meat was 20 percent more expensive than a year ago. If meat was excluded from inflation statistics, CPIX would have dropped to 3.8 percent.
The rate increase was widely predicted as the Reserve Bank seeks to balance influences on the South African economy ranging from high levels of consumer confidence, leading to high levels of spending and low levels of saving, to the effects on the oil price of uncertainty in the Middle East and the weakness of the U.S. dollar.
The reasons for consumer confidence were illustrated by Mboweni's citation of statistics showing that the South African economy grew at rates of 5.0 and 5.5 percent in the first two quarters of 2006, and 4.7 per cent in the third quarter.
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He said there were "tentative signs" that South Africans were cutting their spending, suggesting that reduced sales of motor vehicles might be an indication that the bank's increase in rates over the past six months was having the desired effect.
Nevertheless, South Africans were still borrowing a lot of money: the growth in total loans and advances to the private sector was running at 26 percent a year, and household debts had risen to 73 percent of disposable income.
While oil prices had gone down, they still posed "an upside risk" to the inflation outlook. The exchange rate of the rand against other currencies was showing "a degree of volatility." Part of the recent increase in the value of the rand against the dollar was the dollar's six percent drop against the Euro and the pound sterling.
Related: Statement of the Monetary Policy Committee of the South African Reserve Bank
