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 Interest Rate Outlook for South Africa 
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Joined: Mon Feb 13, 2006 11:07 pm
Posts: 27
Location: Cape Town South Africa
Post Interest Rate Outlook for South Africa
With two 0.5% interest rate increases under our belt, how much more can we expect? After all, the last cyclical rate tightening in 2002 saw an increase of 4%, and before that it ranged from 6% to 12%.

Is that again our destiny, and does it make sense to fix rates? Or will this tightening cycle be much milder?

It will, of course, all depend on events. But omens look good that this tightening cycle will remain limited to a 1.5% to 2.5% range. If this were to happen, it would be one of the mildest experiences since the 1960s.

The key questions facing us is whether the economy will overheat any time soon, and cause general prices and labour costs to start accelerating much faster than seen so far, or whether we can expect some kind of external supply shock hugely putting up the prices of some (imported) commodities.

The good news appears to be that the economy can handle faster spending and output growth better than in the past, with prices showing little strain on account of the faster pace of growth.

The real exposure, as so often before, seems to be global and via the balance of payments.

As things stand, we are already absorbing certain realities here. Oil is well over $70/b and showing every inkling of wanting to go higher, given limited supply flexibility and still steady demand growth. Food prices also have seen increases, linked to global weather. And the Rand is 10% weaker than the average of the past year. That further increases the local costs of some imported goods.

The projection is for at least a 1.5% to 2% increase in CPIX inflation over the coming twelve months compared to the last twelve. In the process, the SARB projects the CPIX to go modestly outside its 3%-6% target band in the first half of 2007.

Clearly no train smash, but for an economy getting used to 4% inflation and 6% wage and salary growth and the implied real income gains, this changes the goalposts a bit. To prevent inflation expectations from drifting higher, maintaining real rates in the economy at a stable level and be seen moving in lockstep with our emerging peer group, a modest interest rate tightening of 1.5% to 2% is envisaged for this cycle.

Whether it will become more may depend on how strict global central banks still become, how far oil rises and the Rand sinks. Shock developments here could boost CPIX inflation much more, in turn inviting a doubling up of SARB intentions.

But as Governor Mboweni kept on saying in public, these are simple projections, dependent on assumptions. Meanwhile reality changes daily, for good and bad. It is that reality, and associated sense of future risk, that will inform the SARB at its next couple of meetings, just as at the recent two.

The betting is that there will be one, and possibly two, more 0.5% rate increases to go. But that projection is mostly shock-free. Now for the reality.

Oil, food, Rand. There is much that can still happen here, as in the actions of the key global central banks, in turn shaping the environment of the more exposed countries.

So far, though, things continue to look good for a soft landing, with only still minor upside on interest rates.

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on

Luther Diedericks

Thu Aug 17, 2006 8:24 am
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