Interest rates up in South Africa

PRETORIA - South Africa's central bank raised its cash rate by half a percentage point to 8.0 per cent today, in line with expectations, warning that the country's inflation outlook had deteriorated "moderately".

But Reserve Bank Governor Tito Mboweni left the door open for further interest rate increases in the continent's biggest economy, highlighting inflation risks from high global oil prices, the weaker rand and rising labour costs.

"The MPC (monetary policy committee) remains concerned about the longer term threats to the inflation outlook and has therefore decided that a further adjustment to the cash rate would be prudent," he told a televised press conference.

The central bank kicked off a cycle of rising lending rates in the continent's biggest economy with a half percentage point increase in June -- the first since September 2002 -- blaming mounting price pressures mainly on the rising fuel costs.

Mboweni cited several other factors as inflation risks on Thursday, and warned that the annual increase in the CPIX index targeted for monetary policy would breach the upper end of its 3-6 per cent target range during the first two quarters of 2007.

This compared with the central bank's prediction two months ago that the annual increase in CPIX -- which rose by 4.8 per cent in June -- would only briefly peak at 6.2 per cent in the first quarter of 2007

The rand firmed by four cents to 6.85 versus the dollar after Mboweni's statement. Government bonds also firmed, largely on relief the interest rate hike had not amounted to a full percentage point -- which some had thought was possible.

Yields on the benchmark R153 bond due 2010 were down by nine basis points over the session at 8.54 per cent.

Mboweni said the central bank had no intention of being aggressive in raising rates and would remain "prudent".

But many economists described his remarks as "hawkish", and predicted another half a percentage point increase in lending rates at the central bank's next policy meeting in October.

"We still foresee further monetary policy tightening based on his statement," said Standard Bank economist Elna Moolman.

"Given that they foresee CPIX inflation to be outside the target range for half a year ...we expect the Reserve Bank to hike interest rates again at the next meeting by 50 points."

Mboweni said the bank expected the annual rise in CPIX to subside to just above five per cent by the end of 2008 -- which compares with a June forecast it would sink to 4.8 per cent. Rising food prices, which account for more than a fifth of South Africa's consumer price indices, were seen as a big concern. So was the weaker rand, which has depreciated by about 14 per cent on a trade-weighted basis so far this year.

But the biggest surprise was a sharp increase in non-farm unit labour costs, which Mboweni said jumped by 7.6 per cent year-on-year in the first quarter of 2006, accelerating from 2.6 per cent in the previous quarter.

Growth in employment had outpaced output, but it was too early to tell if this represented a reversal of the previous benign trend in labour costs, Mboweni said.

"These factors, combined with the general depreciation of the rand, has resulted in a further deterioration of the inflation outlook," he said.

Economists generally welcomed the interest rate hike, which is seen as unlikely to bite too hard into economic growth, already expected to slow this year after expanding by 4.9 per cent in 2005 -- its fastest for more than two decades.

"I think it is the correct decision. It sets the right balance of vigilance versus slowing things down too much in terms of economic growth, and perhaps over-reacting to data seen over the past few weeks," ETM analyst George Glynos said.

All 16 economists polled by Reuters last week had predicted the cash rate would rise by 50 basis points to 8.0 per cent.

Mboweni also sent a reassuring signal that the widening deficit on South Africa's current account -- its broadest measure of trade -- would not put more pressure on the rand.

Indications pointed to another big shortfall in the second quarter of 2006, but it was likely to be adequately financed by capital inflows, he noted. The deficit amounted to 6.4 per cent of gross domestic product in the first quarter, a 24-year peak.

- REUTERS