Bank will keep tightening policy grip, says economist
June 21, 2007
By Ethel Hazelhurst
Johannesburg - Domestic interest rates had been too low for too long and the delay in hiking rates had encouraged more people to get too deep into debt, Chris Harmse, the chief economist at Dynamic Wealth, said in a presentation yesterday.
Harmse, a former University of Pretoria professor of economics, predicted that interest rates could rise further, by as much as 2 percentage points over the next 18 months.
The Reserve Bank raised its official repo rate from 7 percent last year to 9 percent by December. It held rates static at the next two meetings of the monetary policy committee in February and April, before hiking them a further half percentage point two weeks ago to 9.5 percent. This came after the release of April data that showed CPIX (consumer price index minus mortgage costs) had breached the bank's 3 percent to 6 percent target range.
Harmse said the more probable outcome was two further half percentage points in August and in October, followed by a year of interest rate stability.
But if these increases failed to stem inflation and reduce the current account deficit, or if the rand weakened sharply, a further 1 percentage point rise might be necessary.
Harmse criticised the pause in raising rates because the inflationary dangers were already clear in February and April.
The changes in the bank's inflation forecasting model were another contention. The CPIX forecast was changed from 6 percent in December to 5.6 percent in February, 5.9 percent in April and 6.3 percent in June.
The major threats to inflation he identified include: the oil price, which is likely to remain between $60 and $70 (R425.71 and R496.67) a barrel in the months ahead, due to supply problems; pressure from electricity prices after Eskom asked for an 18 percent tariff increase next year and 17 percent the following; high national food prices because of a shortage of land; and above-inflation demands for wage increases.
But the underlying problem he said was that growth in expenditure far outstrips growth in production: gross domestic product rose 5.6 percent in the last quarter of 2006 while gross domestic expenditure rose 12.3 percent.
An indication of the extent of the pressure in the pipeline comes from the growing gap between CPIX and producer inflation, which leads consumer inflation. The producer price index rose 11.1 percent in April, headline consumer inflation rose 7 percent and CPIX rose 6.3 percent.
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