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Backwards and forwards

15 May 2006 Angelo Coppola

According to Dennis Dykes - from the Nedcor Group Economic Unit - the rand weakened sharply on Friday, dragged down by negative sentiment towards emerging market currencies.

The local bond market weakened on growing expectations of higher domestic interest rates, with the yields on the R1942008, R1532010 and R1572015 jumping to 7,27%, 7,37% and 7,60% respectively from 7,15%, 7,23% and 7,47% a week earlier.

Money market rates ended the week mixed, with the 3-monthNCD falling to 7,15% from 7,20%, while the 6- and 9-monthNCDs rose to 7,30% and 7,40% respectively from 7,25% and 7,35% in the previous week.

Weaker global equity markets weighed on the local equity market on Friday, with the FTSE-JSE all share index losing 0,2% to end the week at 21781,5 from 21822,2, after closing at a record 22094,1 on Thursday.

Industrials and financials were down by 2,6% and 1,9% respectively at 17687,2 and 19617,8. However, the basic materials index gained 3,1% to close at 22711,4, helped by strong increases in the platinum index (up 5,9% to 67294,4) and the gold index (up 4,9% to 3129,6).

The Reserve Bank released its first bi-annual Monetary Policy Review for 2006 on Thursday. In the actual review and the formal presentation of the Monetary Policy Forum, the Bank largely sketched the same picture of inflation outlined in the last Monetary Policy Committee (MPC) meeting in April 2006.

Essentially, the Bank feels comfortable that the inflation outlook remains benign, underpinned by a significant improvement in inflationary expectations, but sees the risks to the outlook as significant. The inflation outlook has improved continually since the last Monetary Policy Forum in November 2005.

The Reserve Bank now expects CPIX inflation to peak at 4,9% in the first quarter of 2007 and to remain above the 4,5% midpoint of the target range until the end of the first quarter of 2008. Among the risks mentioned at the April MPC meeting, the sharp rise in household debt and a widening current account deficit were singled out for discussion at the Forum.

The Bank pointed out that these two factors increase the economys vulnerability to changes in interest rates, external shocks or a sudden change in international investor sentiment.

The appropriate monetary response to these two developments has also been the source of lively debate within the Bank, with the key question being how pre-emptive should the Bank be in dealing with the growing imbalances within the context of a benign inflation outlook?

The Bank did not give a clear answer to this question, except to say that the appropriate policy response remains uncertain.

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