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tito turns up heat

By unknown | Apr 11, 2008 | COMMENTS [ 0 ]

Staff Reporter

Staff Reporter

It was tough love and an extra half a percent on interest rates from Central Bank governor Tito Mboweni yesterday as he kept the pressure on consumers and business to moderate price expectations.

Following the second Monetary Policy Committee meeting of the year, Mboweni announced a 50 basis point hike in the South African Reserve Bank's repo rate to 11,5percent from today.

The decision pushed the price at which the Reserve Bank lends to commercial banks to a five-year high, and will add R184 a month to the cost of a R500000 home loan.

The prime rate at which commercial banks lend to preferred customers increased to 15percent.

Bond yields surged immediately after the announcement, which repudiated a narrow market consensus that the Reserve Bank would hold the rate at 11percent.

Mboweni said the economy was responding to monetary tightening, but that the inflation outlook had deteriorated since January 31, when the MPC left rates on hold.

"The inflation outlook is being influenced by a series of supply-side shocks emanating from the international oil and food prices," said Mboweni..

Mboweni said the Bank's inflation models suggested price rises would peak in the current quarter at 9,3percent and would return to within the target range only by the fourth quarter of next year.

But he said this calculation did not include the price hike that Eskom is seeking and he urged consumer to "go home and pray" that the application is refused.

The Nedbank Group Economic Unit said the decision was not surprising in a climate of rising imported inflation and escalating inflation expectations.

"The danger now is that the economy will slow more severely as households are squeezed by higher living costs and an increased debt-service burden," Nedbank said.

This would be Mboweni's last chance to hike because the next round of gross domestic product figures would be "ugly", said Metropolitan economist Rejane Woodroffe.

The Bureau for Economic Research said in a quarterly inflation survey that inflation expectations had jumped by the highest margin in the eight-year history of the poll with economic analysts the most pessimistic.

Trade unionists, who are about to launch their yearly wage negotiation season, were the least pessimistic with an expectation of 7,5percent for this year.

In contrast to South Africa's ninth hike since the monetary policy cycle turned in June 2006, the Bank of England cut its equivalent lending rate by 25basis points to five percent yesterday as it fought to inject life into an economy dragged down by the sub-prime credit crisis.


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