VZCZCXRO3873
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. 
 
¶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