Mboweni hints strongly at hike in interest rates

Posted On Thursday, 30 March 2006 02:00 Published by
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In a rare comment on the likely direction of interest rates, Reserve Bank governor Tito Mboweni warned yesterday that the next move was more likely to be up than down.

Linda Ensor

Political Correspondent

CAPE TOWN — In a rare comment on the likely direction of interest rates, Reserve Bank governor Tito Mboweni warned yesterday that the next move was more likely to be up than down.

Mboweni also warned against trying to push the economic growth rate beyond the capacity of the economy, because doing so could fan inflationary pressures.

His comments — weeks before the next meeting of the Bank’s monetary policy committee (MPC) — came despite benign inflation data released by Statistics SA yesterday, and despite the fact that economic growth is already outstripping the economy’s potential, according to the Bank’s models.

His warning about interest rates reflects the Bank’s concern about unfettered consumer demand driving inflation higher, as well as the burgeoning deficit on the current account of the balance of payments, which reached a 22-year high of 4,2% of gross domestic product (GDP) last year.

"I don’t want to be somebody who is preaching for a doomsday, but clearly with a current account deficit of something like 4,2%, going forward one should expect that the number of variables connected to this position of imbalance are going to begin to correct themselves," Mboweni told Parliament’s finance committee.

One of these is the rand, which could weaken to correct the imbalance between exports and imports that brought about the deficit. A weaker rand would make imported goods, including oil, more expensive and contribute to higher inflation.

Mboweni’s comments suggest a possible hike in the repo rate, which has been at 7% for the past year. This would be in line with the global tightening of rates by other central banks.

"The bias is on the upside; the bias is on the tightening side, it is not on the loosening side," Mboweni said.

"I don’t know what the MPC will decide at its next meeting, but I will be very surprised if any of them argues for a cut in interest rates at all.

"I think the die is cast not on the low side, but it is probably cast on the high side," he said, acknowledging that he would probably be criticised for his comments. He said inflation was rising slightly above the midpoint of the government-set 3%-6% target range, and required "vigilance" by the central bank.

Turning to the performance of the economy, Mboweni said it had been growing "robustly" and "very impressively", which should not be overlooked in the rush to achieve the 6% annual growth targeted by government’s Accelerated and Shared Growth Initiative for SA.

Last year’s 4,9% growth in GDP was "a very high growth rate for a relatively matured economy such as SA", he said.

"The debate around the absolute necessity for higher growth in the economy needs to take into account the capacity for potential outputs of the economy. Preliminary work done is that the potential output is 4,5%," Mboweni said.

"With the economy growing at 5%, we might be a little bit ahead of our potential output, which technically would mean that there are inflationary consequences down the road."

However, Mboweni cautioned that one of the assumptions of a preliminary technical analysis undertaken by the Bank and the University of Pretoria was that no major structural changes would take place. In fact, these changes were taking place all the time, and the potential output should change in line with them.

Bank economist Brian Kahn said the researchers had measured potential outputs in relation to the productivity of labour and capital. With Sapa


Publisher: Business Day
Source: Business Day

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