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Moderate increase announced

08 June 2006 Angelo Coppola

The analysts and forecasters got it wrong while the markets got it right, as SA Reserve Bank governor Mboweni announced the Banks decision on the local repo rate, following the latest Monetary Policy (MPC) Committee meeting.

Interestingly the local market has actually priced in a 50bps increase for this MPC session, and the governor confirmed this in the MPC stance.

This follows consensus among the experts that the governor was unlikely to increase interest rates this time round, despite record local petrol prices and sky-rocketing crude prices, a commodity cycle that was nearing completion, flattening house price increases, a slowdown in car sales, a local stock market that has corrected to close on 19 000 and a concerned Minister of Finance who talked about consumer credit extension.

On the other hand foreign investors have remained net buyers of local equities, although the local market has retreated, in recent weeks.

Internationally the Iran/USA situation remains essentially unresolved, American soldiers continue to die in Iraq, the US economy is spluttering along, and the China and India markets continue on their merry way, with Japan muddling along. Overall the global economy is growing a solid rate, and global inflation appears to be a manageable levels.

The risks have increased over the last couple of weeks and the US repo rate announcements have had negative effects on several emerging markets. There is geo political tension and yet consumer demand has remained robust and household debt has continued to rise.

Inflation increased by 3.8% most recently, while petrol price movements have played a major role in the CPI number. Goods price inflation declined, clothing and footwear prices dropped and food price inflation increased. Administered prices increased, while imported goods prices increased. Domestically produced goods also increased.

The outlook for inflation going forward, shows a market deterioration in the inflation outlook in the short term, expecting to break the upper range of the target zone, with the Q3 numbers stabilising.

The upward revision concerning the oil price was a main driver in the upward pressure expected to be brought to bear on inflation numbers. Now expected to be at 4.8% for the next two years, and are in line with expectations.

Locally on the up side fiscal discipline, labour costs and benign global inflation levels, despite higher oil prices. While locally the county grew, despite contractions in mining and agriculture.

Household real consumption expenditure was at the same levels as last year, although car sales have come down in the last month, by about 4.1%. Credit extension is still at the same levels at over 23%. Consumer indebtedness has increased, now up at 68% of income. Cost of servicing debt has remained stable.

The international inflation pressure is also being felt locally. The local currency has also depreciated against all the major currencies, in some instances up to 13% since the last meeting.

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