Absa forecasting three more interest rate increases

Absa is forecasting the Monetary Policy Committee to increase interest rates by 50 basis points at its meeting on Thursday and by a further 50 basis points at each of the remaining MPC meetings in October and December this year.

The bank’s forecast, announced today, is contained in a media release announcing SA Reserve Bank data of mortgage advances by the monetary sector increased by 29,8% year-on-year in June 2006, which brought the total amount of mortgage advances to R596,3 billion.

In view of a slowing residential property market and anticipation of higher interest rates before the rate hike in June, mortgage advances growth has hovered around 30% year-on-year since March up to May this year, with growth dipping slightly to just below the 30% level in June.

Absa says current inflationary pressures in the economy point to a further increase in interest rates to be announced on Thursday.

“The CPIX inflation rate moved higher to 4,8% in June (4,1% in May), food price inflation increased to 7,7% year-on-year in the same month (6,9% in May), the international price of oil remains above $70/barrel, while the rand is still about 4,5% weaker than a year ago, although it has recently strengthened somewhat to a level of around R6,85/$.

“While taking these inflationary pressures into account, the MPC will probably also be concerned about the continued strong demand for credit in the economy, with growth of 23,9% year-on-year recorded in credit extension to the domestic private sector in June.

In view of these developments, as well as expectations of CPIX inflation increasing to a level of about 6% in late-2006/early 2007, interest rates are forecast to rise by 50 basis points later this week and by a further 50 basis points at each of the remaining MPC meetings in October and December this year.

This will bring the prime interest rate and the variable mortgage interest rate to a level of 12,5% at year-end from 10,5% at the start of the year.

Against the background of a slowing housing market and higher interest rates in the second half of the year, Absa projects mortgage advances growth of around 15% is at year-end, compared with a growth rate of 27,6% recorded at the end of 2005.
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