Economist forecasts “great possibility” of rate increase

Du Toit’s forecast is based on growing Reserve Bank concern at a wide range of economic indicators that include current consumer demand, higher debt levels and credit extension running at still relatively high levels.

Meanwhile, South Africa’s nominal year-on-year growth in house prices remained firm at 15,5% on average in the first quarter of 2007. This development was supported by continued strong growth in transaction volumes during the period January to March this year, according to Absa’s House Price Index for the first quarter.

In March, reports the bank, a nominal house price growth of 15,5% year-on-year was recorded in the middle segment of the market, compared with a revised growth rate of
15,6% in February. This brought the average price of a house in this segment of the market to about R902 200 in March 2007.

In real terms, a year-on-year growth of 9,3% was recorded in February compared with a revised growth rate of 9% in January, based on the headline consumer price index.
On a month-on-month basis, nominal price growth was lower at 1% in March after growth of 1,3% was recorded in February. House prices increased by 1,4% month-on-month in real terms in February (0,6% month-on-month in January).

Volatility in international oil prices and the rand exchange rate, a sharp jump in domestic fuel prices in April, as well as the drought conditions and devastating fires which occurred in some agricultural regions around the country, are xpected to push food price inflation to higher levels in the near future. These trends do not bode well for overall inflationary pressures in the economy over the short term, especially taking into account that food has a weighting of as high as 25,7% in the overall CPIX index.

In view of further upward pressure on inflation in coming months, together with continued strong growth in domestic credit extension; increasing household debt levels and debt servicing costs; and a substantial current account deficit, the risk for interest rates over the short term is on the upside. The Reserve Bank’s Monetary Policy Committee meets on Wednesday and Thursday next week, with their decision on the way forward for domestic interest rates to be announced on Thursday 12 April.

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