Interest rate boost painful, not brutal
Thursday, 05 June 2008 13:58
South African Reserve Bank (SARB) Governor Tito Mboweni’s recent warning that the bank may raise interest rates by a full 2% in a single swoop sent shockwaves through the country’s economy.
Local economists and financial institutions while concerned with rising inflation appear unconvinced that there is likely to be such a drastic rate hike.
In response to an enquiry, Capricorn Asset Management said the frenzy surrounding the threat of a 2% increase in interest rates is a result of the media misquoting Mboweni.
What the SARB Governor apparently said was that interest rates might rise by another 2% “over the coming months” as inflation problems escalate.
Capricorn noted rather that Mboweni had stressed that the economic situation would worsen before it became any better, insisting, “pain is coming”.
“We do not expect the SARB to be overly dramatic in raising rates by more than 0.5% at a time, especially when the economy is so vulnerable.
“Looking at the data and listening to Mr. Mboweni, we anticipate another 1.5 percent increase in total with the first hike expected in the middle of June.
“Thereafter August, October and December should reveal similar hikes.
From then on depends much on how the market has reacted to these hikes,” Capricorn said.
Senior Manager of Research and Development, Daniel Motinga, said that inflation was creeping up both in Windhoek and Pretoria.
It had become a cause for concern, with central bankers worried about secondary inflationary pressure.
In its latest quarterly annual report, the Bank of Namibia (BoN) stated it would be forced to react if inflation reached double-digit figures, which it may have already reached in May.
“Remember the annualised inflation rate for April was in excess of 9% thus with the latest round of fuel price adjustment we can expect May inflation to edge even higher,” Motinga said.
He suggested Namibians should prepare themselves for interest rate increases of another 75 to 100 basis points as early as next week.
Capricorn Asset Management, part of the group that owns Bank Windhoek, said the South African economy had already felt the pain.
The collapse of first quarter GDP to 2.1% compared to the 5.3% of the last quarter of 2007 showed ample evidence of this.
“Despite this economic slowdown, we expect the SARB to continue with its commitment to combat inflation and further hikes appear to be a foregone conclusion,” Capricorn said.