Absa says interest rate risk on the upside

News > news - 16 Nov 2005
At its October meeting, the Monetary Policy Committee (MPC) kept the repo rate unchanged at seven percent, but warned about the inflationary impact of oil prices, despite little evidence of second round effects.

It appears, Absa notes in its Fourth Quarter Economic Perspective, that the MPC also shifted its stance from a more neutral position to an upward bias, stating its willingness to take appropriate action to ensure that the inflation targets are achieved.

“Although the MPC seems confident that CPIX inflation will not move above the six percent upper limit of the target band, the South African Reserve Bank (SARB) has already had to adjust its expectations upwards from the 5,5% peak projected during its previous meeting in August.”

With inflation expectations increasing, strong credit demand, above-inflation wage increases, rising fuel costs and no indication of a substantial decrease in oil prices over the short to medium term, the Perspective says, the MPC could be forced to make an upward adjustment in the repo rate over the next few months.

“Given the risks in the economy, it seems as if such an adjustment could come in the first quarter of next year in the form of a 50 basis point hike.”

“We do not expect rates to rise more than a 100 basis points, as SARB could achieve its aims with small adjustments in rates, taking into account that consumers have become more indebted and may therefore be sensitive to relatively small changes in interest rates.”
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