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Muted rate hike

03 August 2006 Angelo Coppola

The eagerly awaited MPC meeting in Pretoria surprised the markets today as the Governor announced a moderate increase of 50 bps to the countrys repo rate.

He did say that the MPC would not be aggressive, but chose to use the word prudent, or moderately prudent, instead.

Looking forward, Mboweni wouldnt be drawn on what the MPCs next action would be. There was no agreement to discuss a bias, either way. The oil price and the behaviour of the exchange rate seem to be the main issues that will focus the committees collective minds, in their decision-making process.

Explaining the background to the decision Mboweni said domestic inflation is on an upward trend. Petrol price increases, household consumer consumption is up, consumer confidence is high and credit extension is strong, while the deficit in the current account has remained high, added to which the currency weakness remains a another factor.

In the past there has been considerable volatility and the developments centred around interest rates globally. Lately it appears that some calm is returning to the international markets.

Food inflation has also increased substantially and steadily since 2005. Meat, fish and vegetable price increase are the main contributor. The grain prices havent climbed as much. The other CPIX categories are showing moderate growth rates, while services price inflation has declined.

Consumer price pressure indications come from producer price inflation. The inflation prediction or forecast is going to be outside the target range for the first 2 quarters of 2007. Based on the current assumptions, CPIX will decline slightly to within the range by 2008.

As an aside, Mboweni says that the forecast of inflation is a guide, and it doesnt guide policy. He emphasized that the committee uses its judgment to determine rate movements. The MPC takes a view on the risks that face inflation rate.

Exchange rate movements accounted for a not insignificant portion of the recent spate of petrol price increases. The exchange rate could come under pressure if the deficit continues to increase. This number is only due to be released mid August, and the governor stated that he didnt know what those numbers were.

Household consumer expansion shows little sign of abating, while car sales continue to grow. The wealth creation effect is evident, although house prices did come off slightly. Credit extension also grew, while asset backed credit growth also showed strong signs of growth.

Economic growth although still robust is showing some moderation, while there is little threat to the inflation outlook. Mboweni says that international issues also play a role in the inflation and interest rates decision.

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