Inflation highest since 2002

Speaking to BuaNews on Wednesday following Statistics South Africa's release of the October 2007 CPIX data, which came in 0.6 of a percentage point higher at 7.3% year on year, Twine said the “higher than expected inflation figure will probably make the Reserve Bank more aggressive.

“The decision of the Reserve Bank [when the Monetary Policy Committee meets next week] will still hinge on two sets of numbers, namely the Production Price Index (PPI) and the money supply and credit data.”

Twine highlighted that the money supply and credit data will provide the clincher upon which the central bank bases its decision to either hike the repo rate a further 50 basis points to 11%, or keep it steady.

“If private credit growth is not substantially reduced versus the immediate prior month, then the bank would be justified to raise the interest rate,” he said.

The Reserve Bank, which raised the lending rates by 50 basis points when they last met in October, has raised lending rates to 3.5% since June 2006, in an effort to deal with inflationary pressures brought about by excessive consumer spending.

Twine said the interest rate is effectively the price of credit, and the Reserve Bank would therefore try to reduce liquidity in the market that stems primarily from credit by tightening monetary policy.

Impacts of National Credit Act

“Increasing interest rates is the only transmission mechanism that they have at their disposal to try and bring down credit growth in the market.

“The National Credit Act, [which was instituted on 1 June 2007 in order to regulate the granting of loans by financial institutions] has not had much of an impact, but is starting to bite in certain places such as car sales and borrowing for housing loans.

“I'm sure the banks are a lot more cautious but the NCA is not yet bringing down credit growth,” he said.

The usual contributing factors responsible for the higher CPIX figure for October were food, transport, housing excluding interests rates, household operations, medical care and health expenses, education and fuel and power, according to Stats SA.

The price increments for October were however counteracted partially by decreases in the prices of clothing and footwear.

Twine commented that these industries have been in a decline for some time now and that “the prices have been in a downward spiral countering inflation slightly.”

Another hike expected

As many analysts have already resigned to the fact that the December MPC meeting will spell yet another interest rate hike for South Africans, the economic debate has shifted to the first MPC meeting in February 2008.

When asked what decision he would most like to see in February next year, Twine said: “I wouldn't want the Reserve Bank to change its tightening monetary stance just for the sake of it.”

The Gross Domestic Product figure of 4.7% released by Stats SA on Tuesday, indicated the South African economy is still growing despite the central bank tightening monetary policy.

Wednesday's CPIX figure is the seventh consecutive breach of the Reserve Bank's inflation 3 to 6% target since April this year.

Analysts had forecast that CPIX would only jump 0.3 percentage points up from September's 6.7% y/y.

Reserve Bank governor Tito Mboweni, who chairs the MPC, said at a briefing in mid-November this year that if he were the sole member of the committee, that he would hike rates in December.

Article published courtesy of BuaNews