South Africa: Bank Gives Consumers Benefit of Rates Doubt

Johannesburg — CONSUMERS and businesses were handed a reprieve yesterday when the Reserve Bank kept interest rates on hold, but even better news was analysts' view that SA may have reached the end of the interest rate tightening cycle that began last year and saw four successive rate increases.

While the Bank's monetary policy committee decided after its scheduled two-day meeting ending yesterday that the repo rate would remain unchanged at 9%, this was tempered by warnings that inflation dangers remained ever-present.

The Bank was at pains to impress on consumers that it was not sending out a signal that they should resume a credit and shopping spree, cautioning that risks remained in the form of volatile oil prices and a wide current account deficit.

And if persuasion alone should prove insufficient, governor Tito Mboweni let on that the Bank was still considering the idea of increasing commercial banks' reserve requirements.

His comments echoed.

President Thabo Mbeki's view expressed this week that interest rates alone were a "blunt" instrument in trying to control inflation and the exchange rate.

Mboweni said the Bank was looking at the implications that the move would have all round.

"I received the first draft of the proposal this week but it still needs more work," Mboweni said at a media conference following the committee meeting.

Mboweni said that CPIX (consumer price inflation less mortgage costs), its targeted measure of inflation, was no longer expected to breach the upper end of the target band, but would now peak at an average of about 5,6% in the second quarter, and would average 4,7% by the fourth quarter of next year.

Economists said interest rates had peaked in December and the next move would be a cut, barring any exogenous shocks.

"The Bank recognised that while consumer demand is still growing robustly, there is a time lag between last year's interest rate hikes and the publication of the data that will show the full impact of the recent monetary tightening on the economy," Investec economist Annabel Bishop said.

"This information is only likely to be available toward year-end and we expect the Bank will wait until then, barring any deterioration in the rand or oil prices, before deciding whether to move on interest rates again."

As has been the case in the past few monetary policy committee meetings, its central concern was the continued strong pace of household consumption expenditure growth and its potential effect on inflation, Mboweni said.

"There are still only tentative signs that consumer demand growth is abating -- credit extension has continued to grow at robust rates," Mboweni said.

"The challenge for monetary policy is to weigh up the perceived medium- to long-term risks against the more favourable outlook."

Mboweni said the question facing the committee was the extent to which further reactions to interest rate changes could still be expected.

"This is a difficult judgment call to make in the light of the inevitable lags in the data collection," he said.

With the Bank still sounding relatively hawkish, a further, "conventional" tightening could not be ruled out, Standard Chartered's Razia Khan said.

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