Identifier
Created
Classification
Origin
06PRETORIA2395
2006-06-09 14:56:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Pretoria
Cable title:  

Central Bank Unexpectedly Raises Interest

Tags:  EFIN ECON EINV SF 
pdf how-to read a cable
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RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #2395/01 1601456
ZNR UUUUU ZZH
R 091456Z JUN 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 3935
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 02 PRETORIA 002395 

SIPDIS

SENSITIVE

SIPDIS

USDOC FOR 4510/ITA/MAC/AME/OA/JDIEMOND
TREASURY FOR OAISA/JRALYEA/BCUSHMAN

E.O. 12958: N/A
TAGS: EFIN ECON EINV SF
SUBJECT: Central Bank Unexpectedly Raises Interest
Rates


Sensitive but Unclassified; Protect Accordingly. Not
For Internet Distribution.

UNCLAS SECTION 01 OF 02 PRETORIA 002395

SIPDIS

SENSITIVE

SIPDIS

USDOC FOR 4510/ITA/MAC/AME/OA/JDIEMOND
TREASURY FOR OAISA/JRALYEA/BCUSHMAN

E.O. 12958: N/A
TAGS: EFIN ECON EINV SF
SUBJECT: Central Bank Unexpectedly Raises Interest
Rates


Sensitive but Unclassified; Protect Accordingly. Not
For Internet Distribution.


1. (U) Summary. Reserve Bank Governor Tito Mboweni
announced June 8 an increase of 50 basis points to
7.5 percent in the central bank's repurchase (repo)
rate. In its statement, the Reserve Bank's Monetary
Policy Committee (MPC) cited deterioration in the
inflation outlook, continued growth in credit
extension, a widening current account deficit, and
uncertainties in international financial and
commodity markets as the basis for the move. While
local economists were divided on whether the MPC
should raise the repo rate, most did not expect an
increase. Initial reaction from local economists,
however, was largely negative, with some warning that
the increase would lead to slower growth. A
spokesman for COSATU, the largest trade union
confederation, said the Reserve Bank decision
"contributed to continued joblessness and poverty."
The increase, announced shortly before the stock
market closed, led to a 6.5 percent drop in the JSE
All Share Index. Commercial banks subsequently
raised prime lending rates an equivalent amount to 11
percent. End Summary.


2. (U) The MPC statement said that inflation risks
were now on the up side. While its previous forecast
had showed an inflation peak at just below 5 percent
in the first quarter of 2007, the latest forecast
expected inflation to breach the upper end of the
South Africa Reserve Bank's (SARB) 3-6 percent target
range and peak at 6.2 percent that same quarter. The
committee noted that the Bureau of Economic
Research's (BER) most recent survey showed a slight
deterioration in inflationary expectations in 2007
and 2008. BER (Stellenbosch University) now expected
inflation to average 4.9 percent in both of the
coming two years, compared to 4.6 percent and 4.8
percent in its previous survey.


3. (U) The statement repeated earlier concerns
about the continued growth in credit extension. It
said that household real consumption expenditure
increased 6.9 percent (annualized) in the first
quarter of 2006. Bank loans to the private sector

grew 24 percent and 23 percent (y/y) in March and
April respectively, while the ratio of household debt
to GDP rose to 68 percent in the first quarter, from
65 percent the previous quarter.


4. (U) As another concern, the SARB said the
current account deficit continued to widen in the
first quarter due in part to weak export growth and
higher volumes and values of crude oil imports.
Capital flows, however, had remained strong, more
than financing the deficit and enabling a further
increase in the SARB's foreign exchange reserves.


5. (U) The SARB also stated that the international
environment posed increased risks for inflation. It
noted that the rand had depreciated against all major
currencies at a time when the U.S. dollar had also
been weakening. It cited the decline in commodity
prices and a re-rating of emerging market risk as
contributing to the depreciation. Finally, the SARB
noted that the price of Brent crude had averaged
around $75 per barrel since the last MPC meeting,
leading to sharp increases in retail fuel prices over
the last three months.


6. (U) Although the MPC noted that favorable
inflation factors included continued fiscal
discipline, a moderate trend in unit labor costs, and
benign world inflation, its statement concluded that
a moderate adjustment in the repo rate was warranted.


7. (U) The rate hike was the first increase since
September 2002 when the repo rate rose from 12.5
percent to 13.5 percent. Since then the rate had
fallen to a 25-year low. Following the announcement,
the JSE All Share Index fell 6.5 percent to 18,414,
the largest one-day decline in April 17, 2000.
Sector indexes experienced similar declines. Forex
markets, however, were stable with the rand trading

PRETORIA 00002395 002 OF 002


in the R6.7 to R6.8 per U.S. dollar range.


8. (U) Initial reaction from local economists was
largely negative, with many questioning the revised
inflation projections and warning that the increase
would lead to slower growth, undermining the
government's new Accelerated and Shared Growth
Initiative. Business Day, the leading national
daily, said the decision to increase rates was
"strictly" a "no-brainer" based on the SARB's
inflation targets, but it questioned the decision
when markets generally still expect inflation to
remain within the target range and its effect on the
economy. Trade unions had called for a rate decrease
(an unrealistic position) because of the adverse
effects the strong rand has had on manufacturers and
exporters.


9. (SBU) Comment. While the increase was largely
unexpected, and was more than expected by those
advocating an increase, it was not unprecedented.
The SARB moved aggressively to raise the repo rate in
2002 when inflation jumped sharply. Recently Mboweni
has been publicly critical of the continuing increase
in private sector debt levels and has warned that the
next move in interest rates would be up. While high
petroleum prices have not yet pushed up inflation,
contrary to the expectations of local economists, the
SARB is now worried that they will soon. This,
combined with the continued growth in domestic debt
levels and uneasiness in international markets,
prompted the SARB to move preemptively.
TEITELBAUM