South Africa: Central Bank Pushes Up Interest Rates

7 June 2007

Cape Town — South Africa's central bank today increased interest rates for the first time in six months in an attempt to curb inflation.

The governor of the South African Reserve Bank, Tito Mboweni, announced in a nationally-televised statement that the rate at which the bank lends money to commercial banks - the "repo" or repurchase rate - would rise from 9 to 9.5 percent starting tomorrow.

The decision of the bank's monetary policy committee became almost inevitable after news last week that the consumer price index had risen 6.3 percent in the year to April, defeating the bank's objective of holding inflation to between three and six percent for the first time since August 2003.

In a nationally broadcast television address today, Mboweni said fuel and food prices had been the main forces driving up inflation. Petrol prices had increased by 15.5 percent and food prices by 8.6 percent in the year to April - the latter as a result of grain and meat price increases. In addition, the economy was also subject to "more broadly-based price pressures."

Bank forecasts suggested that oil and food prices, as well as a continued high rate of household spending, continued to pose a threat to attempts to keep inflation in check.

International oil prices would remain subject to upward pressure, Mboweni said. He suggested that local food prices were affected by international trends, such as the diversion of grain products to the production of biofuels and demand resulting from higher global income.

The growth in household spending was reflected in high rates of domestic credit, he said, quoting growth figures around 26 to 29 percent. The increase in spending was bolstered by higher employment level and higher incomes. In an aside, Mboweni hit out at critics who had suggested that higher employment rates were "an urban legend."

However, he also noted that the economic growth rate had declined to 4.7 percent for the first quarter of 2007, mainly as result of a drop in mining activity and slower growth in manufacturing.

Nevertheless, he added, "the economy is still growing at a rate around estimated potential and the higher rate of fixed capital formation... is expected to sustain economic growth going forward as well as increase the growth potential of the economy."

Full text bank statement:

Reserve Bank - Statement of the Monetary Policy Committee

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