News 24

16/10/2000 17:12 - (SA)

Reserve Bank signals rate hike Hilary Gush

Johannesburg - The Reserve Bank said on Monday it would not meet the money market's full liquidity requirement on Tuesday, seeking a 25 basis point rise in the key repo rate to 12% to contain inflation.

"The Committee decided to marginally under-provide in the liquidity requirement of the banks at the daily auction of repurchase transactions tomorrow," it said after a special meeting of the Reserve Bank's Monetary Policy Committee.

It said a modest increase in rates now might avoid steep increases later in order to meet inflation targets.

The repo has been steady at 11.75% since January.

The MPC said on Monday that since its last meeting on September 21, trade figures showed the current account could have moved into deficit in the third quarter.

"At the same time non-residents again became net sellers of South African bonds, signalling a possible shortfall on the financial account," the committee said.

As a result of these changes and continued dollar strength, it said pressure on the rand and import price increases raised the risk of higher inflation.

MARKETS SURPRISED

The news surprised the markets, sending bond yields higher and pushing the rand to a new record low of 7.56 against the dollar. The yield on the key R150 bond rose to 13.06% from 12.97%. Shares trimmed early gains.

"It is surprising. I didn't think they would act so soon. It will not lend much support to the rand because it is more external factors than internal factors at play there," PSG Investment Bank economists Noelani King.

"I see no imminent hike in the prime rate and I'm not sure if they (the Bank) will really achieve anything with this."

The South African rand has fallen by around 20% this year, mainly undermined by the strength of the dollar and exacerbated by nervousness about the political and economic crisis in neighbouring Zimbabwe.

A climb in oil prices to 10-year highs has fanned fears that inflation would continue to climb, forcing the Bank to raise rates at a time when domestic demand remains weak and economic growth disappointingly sluggish.

Reserve Bank Governor Tito Mboweni has repeatedly blamed external factors for a rise in the central bank's benchmark measure of inflation, known as CPIX, to 8.2% in the year to August. This is well above the bank's three to six percent target for 2002.

Statistics South Africa is due to release September inflation data at 11:30 on Tuesday.

CPIX is expected to have remained stable at a year-on-year 8.2% in September, while headline inflation is seen edging up to 6.9% from a previous 6.8%.

-- Rachel Gibson (rgibson@hotmail.com), October 16, 2000