Repo rate hike

The decision of the Monetary Policy Committee (MPC) today to raise the repo rate by 50 basis points to 8% comes as no surprise.

Two points stand out in the MPC statement, compared with the previous one:
The SA Reserve Bank (SARB) now expects CPIX inflation to remain above the 6% upper end of its target range for longer, viz. two quarters, instead of it being the previously expected one-off event in Q1 2007.
The rate of increase in non-farm unit labour costs accelerated sharply from 2,6% in Q4 2005 to 7,6% in Q1 2006.

Although the further deterioration in the SARBs inflation forecast points to further interest rate increases ahead, the statement that the SARB intends to be prudent rather than aggressive, and the acknowledgement that economic growth is moderating, point to limited further increases that will probably not exceed 100 basis points.

Because of the normal lag with which monetary policy acts, it will not make a major difference to the inflation outcome in the next twelve months. The increase in the repo rate should rather be seen as an attempt to prevent an inflationary spiral from developing.

South Africa will nevertheless remain hostage to international portfolio capital flows, and although they may not turn negative one cannot assume that they will continue at the pace that prevailed before that start of the turmoil in emerging markets in May 2006.