Up another 50 points

Liquidate debt and increase savings and invest more, says the Reserve Bank governor as he hikes interest rates by 50 bps. He suggested that consumers should tighten their consumer belts a bit - it doesn't have to be so loose.

Reserve Bank governor Mboweni hiked interest rates today, sending a message to consumers and the markets that inflation pressure is starting to mount, as consumer consumption continues unabated, and there are no signs of financial distress in the country, in terms of insolvencies.

The economy grew by 4.9% although it is expected that the rates will be lower than they were last year. They (the MPC) are concerned and the risks to the inflation rate remain high, notwithstanding the movements in the exchange rate and the lower oil prices.

He did say that they would be looking at the inflation outlook, and wouldn't be governed by the exchange rate movements. Added to which Mboweni is hoping to keep the inflation rate well below the top end of the target range, and not just marginally within the range.

He wants to see measured reaction to any inflation pressures and indicted that there wouldn't be any gung ho actions. He referred to his predecessors saying that they would have hiked rates a long time ago, based on the statistics that are being delivered.

Locally there appears to be been a 50 bps increase priced into the market with some portions of the market pricing in a 100bps increase at the October announcement, and the same players pricing in another 100bps increase, in December.

Of particular concern though was the 9.6% increase in domestically produced goods inflation, says Mboweni, although the short term pressure on inflation is moderated by the downward move of the petrol prices.

Production prices however remain a problem, and inflation is expected to move towards the upper end (6%) of the target range, over the focus period, remaining at these levels between the second and fourth quarters of 2007, with inflation dropping to 5% in 2008, he said.

Household consumption is at a record high - some 8% year on year - and the highest percentage since 1995.

Some of the local and international background activity that led to the decision:

Oil The oil prices have come down significantly, and the average price between meetings has also come down, 11% in rand terms and 20% in dollar terms. Futures prices are $15 down since the last meeting.

Is it good or bad news and could it lead to a slow down in economic growth, was the question? It appears that the MPC is anxious about oil prices and the risks are still high, as the price could move upwards quickly as a geo-political pressures spiral.

North America In the USA GDP is slowing down, and job growth is slowing and the consumer prices are pushing upwards. In the Euro area all the leading indicators are looking positive and the positive, although there is a bit of concern, which led to a rate increase in October.

Asia In Japan the statistics show that consumer price indices are up, although it appears that CPI is declining. In China there has been a good growth 11% up, year on year, with 29% increase in fixed investments, and the trade surplus was at record levels.

In India - growth rates are at impressive 9% per annum, while CPI is close to 7%, down slightly, from the previous reporting period. The rest of Asia is also solid, with an 8.4% average growth in GDP.

South America In Brazil consumer prices are coming down and interest rates are coming under pressure. Foreign trade surplus is down. For the rest of Latin America impressive growth rates are the order of the day, quarterly and on an annual basis - 8.3% average growth rate.

Resource countries The resource rich developed countries - Canada, Australia and New Zealand - Canada was operating within the range, while Australia and New Zealand were operating outside of the inflation target range.

In terms of predicted GDP growth for the world, the IMF has revised the growth numbers upwards for the OECD countries.

According to the Efficient Group, StatsSA today released the mining production data for August and the value of sales data for July, reporting a positive increase in mining production for only the second time since December 2005.

The high gold and commodities prices in general probably prompted increased production, and although such an increase requires a long lead-time, the benefits are being enjoyed now.

Financial markets Last week the was some action on the financial markets as the banks started to accept that the repo rate was going up and bid at prices below the 8% limit, and the bank had to under-provide.

The local bond market is up 8% compared to the period prior to the last MPC meeting and the yield curve has flattened, while the market believes that the tighter monetary policy will be effective.

Internationally the commodity prices have all improved, while the SA rand has deteriorated significantly. SA is the problem. Previously the rand was trading at R6.85 and it is currently 80c up (12 Oct).

Locally the JSE All Share broke several records and the weaker rand could have played a contributory role in these records.

On a macro economic front real gross domestic product - household consumption was up 8%, while government consumption was very strong in the second quarter, while fixed capital formation saw acceleration up by 11% in the second quarter, and it was widespread, with some government interest.

The nation's savings ratio edged slightly up, off a low base, while residential buildings construction has declined. Total vehicle sales were also calming down, and leveled out, with a slight reduction evident. On the heavy commercial buses and vehicles side, these continued climb.

Financial distress - reflected in the number of insolvencies, is also not evident, and described as exceptional, by SARB officials, while employment in the non-agricultural areas was also up for quarter 2.

The inflation outlook remains fairly well contained, although food price inflation and meat prices are particularly brisk, in South Africa. Meat has a 7% weight in the CPIX basket, with petrol and diesel weighing in at 6%.

Imports were down slightly in the Q3, and growth in export values, including gold, while net reserves rose at a fair pace and there has been a fairly decent improvement.

On the credit extension front, mortgage advances were very strong, while other loans and advances very strong recently, while leasing and HP has come down slightly, by some securitisation activity.

House prices decelerated to 13%, and month-to-month numbers also down, although these are still relatively high.