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Debate over possible repo rate increase

Posted On Tuesday, 12 March 2002 03:01 Published by
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Economists generally forecast rise of 150 basis points to 200 as part of inflation-targeting exercise
Economists generally forecast rise of 150 basis points to 200 as part of inflation-targeting exercise

Capital Markets Reporter

THE SA Reserve Bank's monetary policy committee is expected to increase the repo rate for the second time this year when its meeting concludes today or tomorrow, confirming its concern about meeting inflation targets following the rand's depreciation last year.

The term 'stagflation', coined in the 1970s and referring to a low growth environment that still produces high inflation, is making a comeback, and those opposing higher rates warn that SA faces such a scenario.

Although the debate surrounding the viability of inflation-targeting in a country that faces sluggish growth continues, 17 of the 18 economists surveyed by Reuters last week see rates going up, and 16 of the interviewees see rates increasing by 100 basis points.

Over the medium term, economists have turned bearish on inflation; many feel rates could rise by as much as 150 basis points to 200 basis points, compared to earlier expectations of a 100 basis-point rise. January inflation, which saw CPI-X, consumer inflation excluding mortgages, surprise on the high side at 7,1% confirmed their fear.

Brait Merchant Bank economist Colen Garrow said the Reserve Bank had shown its commitment to fighting inflation when it raised rates by 100 basis points in January. Others thought it might feel the need to reinforce that by another rise to demonstrate it was not prepared to miss next year's target.

It has a target to limit CPI-X to between 3% and 6%.

Prodigy Asset Management economist Johan Rossouw said the Bank had little option but to raise rates given its inflation-targeting mandate, and would rather raise rates to influence the 2003 target than do so later. He said that, although inflation targeting may hurt growth in the short term, it counted on lower inflation in the long term, and higher real growth.

JP Morgan believes SA's inflationary problems are not demandrelated, but result from cost-push factors that have arisen from the weak rand and high food prices.

The producer price index (PPI), representing the cost pressures companies are facing, has climbed over 10% recently. Although the relationship between PPI and consumer prices has broken down over the last year as producers have struggled to pass rising costs onto consumers, they have started to do so. Expectations of higher inflation and the declining rand have helped them do this, and JP Morgan says the Bank will be mindful of this.

JP Morgan says demand is fragile, and the consumer buying spree experienced in the last quarter was temporary. It says this view has been backed up by the fact that car sales shot up 28% month-on-month in January as expectations of higher prices drove sales higher, but fell 13% in February as prices actually rose, and the 100 basis-point rise in rates hurt consumer confidence.

Private sector credit extension, an indicator of consumer demand, also shows signs of an unwillingness to spend. JP Morgan says the indicator rose 0,1% in January, after climbing 2,9% in December, confirming the effects of January's 100 basis-point rise in rates on the consumer's willingness to get into debt.

Stellenbosch University's bureau of economic research releases the results of its inflation expectations survey when the monetary policy committee meeting ends.

Publisher: Business Day
Source: Capital Markets Reporter
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