The South African Reserve Bank (SARB) is likely to increase the repo rate - the rate at which it lends to the country's commercial banks - by 50 basis points to 10% amid unstable global market conditions spurred by a liquidity crisis in the United States.

Bureau for Economic Research (BER) director Benjamin Smit told BuaNews on Monday that central banks normally hiked interest rates in the advent of increasing debt.

Smit said central banks across the world were likely to freeze interest rates in the short-term to deal with the current crisis.

He added, however, that while there was pressure on the Reserve Bank not to raise the repo rate, it was likely they would implement a 50 basis point increase at Thursday's monetary policy committee (MPC) meeting.

Economic research by financial services company JP Morgan shows that rising core inflation is as a result of higher food and energy prices, as well as higher than anticipated wage settlements.

Figures released by Statistics South Africa in July show an annual increase of 6.4% in consumer inflation, rising mainly due to increased food, transport, fuel, power and medical care costs.

This is beyond the Reserve Bank's inflation target band of between 3% and 6%.

"Beyond the widely anticipated 50 basis point rate hike, we now expect the SARB to raise rates a further 50 basis points in October, bringing the repo rate to 10.5%," JP Morgan report added.

If the repo rate is increased again in October, as JP Morgan suggests, the SARB will have raised the repo rate by over 300 basis points since June 2006.

There might be some relief for South African consumers though, with economists believing that lower crude oil prices will lead to a drop in the local fuel price.

BER economist Christelle Grobler said economic indicators were currently forecasting a 27 cent drop in the fuel price, but "bearing in mind the volatility, let's say [the decrease] will be around 20 cents early next month".

She added that official BER forecasts indicate that inflation would only fall under the 6% target ceiling by the second quarter of 2008.

Source: BuaNews

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