Bank sets scene for interest rate hikes

Posted On Wednesday, 16 January 2002 03:01 Published by
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Some economists think the move is Mboweni asserting his independence
Some economists think the move is Mboweni asserting his independence

Economics Editor

IN A surprise move, the Reserve Bank increased its repo rate yesterday by a full percentage point to 10,5%, citing possible secondary effects of the rand's depreciation on inflation, and sending financial markets into a tailspin in the process.

Currency, bonds and stock markets fell sharply after the announcement, which came less than a month after the Bank and the national treasury issued a joint statement dismissing as 'premature' talk of the Bank missing its inflation target, despite the currency falling almost 40% against the dollar last year.

The decision received a mixed response, with some economists hailing it as an affirmation of the Bank's independence and the integrity of its inflation target. Others felt it was merely a symbolic gesture that would do little to change the outlook for inflation, and would instead push the economy closer to recession. Commercial banks are expected to follow, and raise their prime lending rates to 14% today.

The rand crashed to R11,78 on the news, before regaining some of the loss to trade at R11,6855 after the close of local markets a 15c or 1,3% loss for the day. The news also rattled the gilts market, with the yield on the R150 long bond crashing through the 11% level, to settle at 11,13%, which was 73 basis points higher than the previous close of 10,40%.

Economists said the move would not prevent the Bank missing its target of limiting CPIX consumer inflation excluding mortgages to between 3% and 6% this year, although there was debate about whether it would help it meet next year's target.

There was also debate about the way the move was communicated, with some economists lamenting what they said was increased unpredictability in the conduct of monetary policy. It contradicted an official statement less than a month ago, and they said it risked turning forecasting into a 'guessing game'.

Chantal Valentine, an economist at Deutsche Bank, came to the Bank's defence, saying that while predictability was preferable it had to be balanced with the 'need to act decisively when things go wrong'. Citadel chief investment officer Dave Mohr also supported the Bank's stance, due to the large losses suffered by the rand on a trade-weighted basis.

The Bank and treasury said last month that the feed through into inflation of the rand's depreciation 'may be ameliorated to some extent by the depressed economic environment and the continued decrease in import prices'. When the statement was issued, the rand was trading at R12,10 to the dollar, compared with R11,50 when the Bank made its move yesterday.

Statements by Finance Minister Trevor Manuel and treasury director-general Maria Ramos last month also seemed to rule out rate hikes.

Some economists said the hike might have been a move by Mboweni to assert his independence. Rand Merchant Bank chief economist Rudolf Gouws said: 'An important message from today's announcement is that the Bank's independence, as well as its resolve are not to be underestimated and that it will occasionally take decisions which might be politically unpopular.'

But Merrill Lynch economist Nazmeera Moola said the rate increase was unfortunate as 'domestic demand was not growing at unsustainable levels that needed to be curbed'.

Publisher: Business Day
Source: Economics Editor

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