1% June interest rate rise likely

 

1% Jun

1% June interest rate rise likely
2008/05/21

With April's rate of inflation having straddled the double digit barrier and apparently still unchecked in its upward trend, expectations of a 1% rate increase at the next Monetary Policy Committee (MPC) meeting on June 12 have firmed, according to a media release on property news website www.rodneyhayter.com.
Motivation behind such MPC boldness – it would be the first full percentage point increase since September 2002 – lies in the belief that the size of increase could deliver a knock out blow to less serious credit lending, according to Jeanne van Jaarsveldt, RE/MAX of SA finance and marketing director, who believes the MPC has little left in its armoury to rein inflation back into its target band of 4% to 6%.
Efficient Group chief economist Dawie Roodt also believes the MPC is now ready to try its hand with more psychological tactics when it reviews the increasingly bleak inflation situation in June.
Roodt points out that the Reserve Bank has a double role – "firstly to control inflation and secondly to curb inflation expectations", which he believes could prove effective with a 1% rise.
Bad news definitely for a property market already wilting from nine rate rises in the last 24 months and other extraneous, but equally sentiment damaging factors, but Roodt and Van Jaarsveldt believe an iron fist approach could serve a big enough market blow for the MPC to exclude further increases for the rest of the year.
According to van Jaarsveldt the size of such an increase would further dampen the property market, "but if it proved effective in arresting the need for further hikes then we could expect to see some restoration of market sentiment toward the end of the fourth quarter".
But Roodt only expects the gloom to lift early next year with conditions getting a little worse between now and then, pointing out the inevitable time lag between rates falling and a restoration of confidence in credit-driven home buyers.
Some cheer filtering through is the gathering attractiveness of investment activity, but the real opportunities, according to Roodt, are still a few months down the line when the market tightens further and especially if the MPC breaks the trend with a 1% hike, which John Loos, property economist at FNB, strongly discounts, given the MPC's stated reluctance to increase rates further.
"In fact, the MPC were even talking about the possibility of a quarter percent rise instead of a half percentage point at it's last meeting."
Loos strongly discounts the MPC resorting to any radical interest rate adjustments even if inflation data continues to deteriorate. Supporting Loos' view is the fact that the current key inflation drivers – oil and food prices – are essentially out of the MPC's sphere of direct influence.
John Roberts, managing director of mortgage originator Bond Approve, also discounts any drastic rate adjustments by the MPC. His view is based on the historical rate adjustments by the committee and the fact that inflationary drivers are largely out of the MPC's power.
However, he does see the probability of a further rise as does Absa's economics department who notes that March's jump in Private Sector Credit Extension (PCSE) to 26,6%, while not a deciding factor for the MPC, is a further disappointment following poor inflation numbers earlier in the month, believing it is unlikely that the slowdown in the real economy will allow the inflation-targeting SARB to leave rates on hold at the 12 June MPC meeting.

e interest rate rise likely