South Africa: Last Week's Rate Rise Triggered More by Fear of Zar Weakness Than Surprising Mpc Forecast of Inflation Overshoot; Monetary Policy Dilemma Persists

Summary

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The SARB's half-yearly monetary policy review just over a month ago said that the inflation outlook had improved significantly and concluded that "On balance, the current outlook for inflation remains benign and indicates that the prevailing stance of monetary policy is appropriate." Given this backdrop, it is difficult to see what has triggered the sudden change in view at the SARB. According to the MPC meeting last week, which surprised markets with a 50-basis point rise, CPIX inflation is now expected to peak at 6.2% in Q1 2007 rather than just below 5% as it had previously thought, with a significant upward revision in the oil price forecast being the main difference. This new forecast looks too high - we still see inflation peaking at below 5.5% early next year - and the rate hike may have been motivated more by a desire to stem the recent fall in the ZAR, which is down to an 11-month low of ZAR6.90 to the USD currently. And more weakness may lie ahead if US rates rise again at the end of the month, as seems very likely. The problem facing the SARB is to manage market expectations in order to avoid a run on the ZAR and an even steeper fall in local equity markets, which could deter foreign portfolio investment inflows and thereby add to the problems of funding the still-widening current account deficit and further weaken the ZAR.

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South Africa: Last Week's Rate Rise Triggered More by Fear of Zar Weakness Than Surprising Mpc Forecast of Inflation Overshoot; Monetary Policy Dilemma Persists

Last week's rate rise surprised in two ways...

Given the recent trend in global interest rates and with the Federal Reserve expected to lift US rates yet again at its FOMC meeting on 28-29 June, the decision by the monetary policy committee of the South African Reserve Bank (SARB) to raise rates last week was not completely une...

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