Absa forecasts likelihood of October interest rate increase

Absa has moved forward its projection of an interest rate increase to October this year with the likelihood of a 50 basis point hike.

The projection follows today’s Producer Price Index (PPI) inflation announcement for April coming in at 5,5% year-on-year, which is higher than March’s 5,4% and the consensus forecast of 5,2% (as surveyed by Bloomberg). April monthly increase of 1,0% was the highest rate since July 2005 when the PPI inflation rate rose by 1,1%.

Elaborating on its forecast, South Africa’s largest commercial bank, says the increase in the average price of Brent crude oil to $71/bl so far in May is putting strong upward pressure on local fuel prices, with the petrol price having increased by 39 cents per litre in May following the 22c increase in April.

“The strong rand, which has served as a cushion to high international crude oil prices during the past 18 months, has slipped to around R6,60/$ and should the rand remain at this level for some time still, fuel prices will continue to increase.

“This must be worrying to the SA Reserve Bank, which has already warned about high household debt levels, continued strong consumer demand and widening current account deficit. Furthermore, the geopolitical and supply concerns that have supported high oil prices may keep prices high for the remainder of 2006.

“As a result, we have moved forward our interest rate increase to October this year, at which time a 50 basis point hike is pencilled in.
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