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Friday the 13th – lucky for most…

13 August 2004 Angelo Coppola

The MPC meeting (12.8.04) held some surprises, with newly re-appointed SARB governor Mboweni saying that rising oil prices are the biggest threat to positive inflation expectations, and could neutralize international and local growth projections.

“It’s always wise that when the facts change, that it is time to change your mind,” said Mboweni, prior to reading a statement prepared by the MPC.

“Central banks don’t respond to pressure,” said Mboweni, “We respond to the outlook of inflation.” He was referring to the march by miners on the SARB offices yesterday (11.8.04).

And with that he announced that there would be a drop of 50 basis points (0.5%) in the repo rate, effective Friday 13 August. The banks were expected to announce consumer interest rate cuts.

Mboweni indicated that administered prices were outside the target inflation zone, as were increases in medical costs, although the government had indicated that there would be a moderation in the increase in administered prices.

Some interesting analysis and numbers came to the fore during the pre-MPC briefing, which included labour costs in the USA, which was up for the last three quarters, while in Japanese inflation rates were expected to be around 0%.

Since the last MPC there have been some drivers affecting the markets, including the concern around the slowdown of the US growth; the weakening dollar exchange rate; and inflationary concerns in the euro area.

The local economy is looking good, with confidence levels high, while manufacturing seems to be climbing, albeit off a low base, while mining production is up, with platinum taking the place of declining gold production.

There was however a surprising trade account deficit during the second quarter, due mainly to the large quantity of oil that was imported. This was the first time in 20 years that the country has seen a deficit, and despite this deficit, the local currency wasn’t affected.

CPIX has stayed within the target areas for the last 10 months, with CPI numbers are also in a good space at around 5%, although services CPIX is closer to the 7% level, with goods CPIX in the target zone.

Retails sales continue to climb, while in employment – on the non-agricultural side – there was a surprise drop in numbers. On the other hand wage settlements involving Numsa were most recently fixed at 7.5%.

Locally the exchange rate against the dollar and its volatility, the benign inflation data, and an increase in the gross reserves, have all been evident since the last meeting.

On the currency markets – the rand has continued to appreciate against the dollar, between the last MPC meeting and this meeting – climbing 5%. In terms of the euro and the pound, the rand also appreciated against these currencies, with the dollar being the main driver.

The consensus view is that the currency is probably more resilient that was initially expected and predictions that there may be a sell-off of the currency in the near future are diminishing.

Domestically, there seems to be some moderation in terms of interest rate expectation.

In terms of international interest rate movements recently, there have been increases of around 0.25% from some of the euro area central banks, and the main area of concern is the oil price.

If the international estimates are correct, the average increases won’t have a major effect on inflation rates, with the IMF sticking with their 4.5% growth projections for 2004 for the world economy, in spite of pessimistic oil price predictions.

In the euro area the growth expectations are between 1.4% and 2% for 2004, although demand is rather weak, and the business climate is not looking too bad, with the inflation numbers fairly flat, generally driven upwards by fuel costs.

In terms of Greece, the Olympics will see the government there breaching their 3% deficit target, due mostly to the upgrades in tourism infrastructure, while in Latin America the consumer prices don’t highlight any major issues.

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