All eyes are on the MPC

2008-04-07 00:00

The SA Reserve Bank (SARB) Monetary Policy Committee (MPC) will on Thursday finally settle one of the most intensely debated current topics — the short-term fate of interest rates.

Many economists think that although a half-percent interest rate hike is very likely, this decision may in fact be a mistake.

The rapidly rising inflation rate will force the hand of SARB governor Tito Mboweni in raising rates.

However, there is a chance that the moderation in consumer spending, private sector credit extension and money supply may persuade the MPC to leave interest rates unchanged.

The Efficient Group believes that given the SARB’s inflation targeting mandate, another hike would be the right decision.

However, group economist Fanie Joubert said the retail and motor trade slowdown, coupled with a moderation in household consumption expenditure, provides an argument for leaving rates unchanged.

Professor Chris Harmse, head economist at Dynamic Wealth, has questioned the wisdom of another hike, "especially as the major proportion of inflation is caused by factors over which interest rates have little if any control".

However, Professor Nicola Viegi, researcher and economist at Economic Research SA, argues that using inflation targeting with "increased resolve" would be the policy makers’ winning formula.

She said rising inflation should be seen as temporary, and the SARB’s interest rates instrument should be used with more vigour.

Nedbank’s group economic unit noted that the MPC faces a catch-22 situation. "If the MPC hikes rates, the economy … will be in a much worse state by the end of the year.

Weaker growth prospects will put pressure on the rand, which may have negative implications for inflation over the medium term. "Alternatively, if rates are left unchanged, inflation expectations may rise and the rand weaken further, putting additional pressure on import prices and further worsening the short-term inflation outlook."

kavith@witness.co.za

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