U.S. Treasuries slip as foreign central banks shy away

By Vernon Wessels
Business Report, South Africa
December 12, 2003
a href=http://www.busrep.co.za/index.php?fArticleId=307301http://www.busrep.co....

PRETORIA -- The threat of rising inflationary pressures in
2005 gave the Reserve Bank's monetary policy committee
only enough space to ease interest rates by 50 basis points
yesterday, disappointing the market, which had expected a
cut of up to 150 basis points.

The R150 short-dated government bond weakened 77 basis
points following the announcement, while the rand gained as
much as 3 percent versus the dollar.

Although the outlook for domestic and international inflation
looked favourable, the Reserve Bank's forecasting models
showed its targeted measure of inflation quot;could reach a
lower turning point during the course of next year and edge
up to higher levels in 2005,quot; said Tito Mboweni, the Reserve
Bank governor. But the target measure, CPIX (headline
inflation excluding mortgages), should remain below the
upper boundary of 6 percent, he said.

CPIX measured 4.4 percent in October as the rand's
strength pushed down the cost of imports.

There was no indication the bank would undershoot the
3 percent bottom end of the range, Mboweni said.

The central bank has to take into account how its action
will affect future inflation, as there is a lag of anything from
12 to 18 months as the effect of the rate cuts works its
way through the economy.

The main reason for the projected increase in inflation
pressure was strong domestic demand for goods and
services.

quot;In the first nine months of 2003 the growth in domestic
final demand amounted to no less than 4 percent,quot;
Mboweni said.

quot;Growth in personal disposable income and an increase
in bank credit extension caused real [inflation adjusted]
private consumption expenditure to rise by about 3 percent
over this period.quot;

A reduction in interest rates of 550 basis points since
June, which has brought the prime lending rate to its
lowest level since March 1981, will fuel demand by
households.

Mboweni was also concerned that adverse weather
might result in poor crops and cause food prices to rise,
while the unpredictable nature of the rand could play
havoc with inflation.

quot;It is impossible to predict what the external value of the
rand will do over the coming months,quot; he said.

This may indicate the central bank is concerned the
currency may weaken and reverse the positive, albeit
belated, impact the strong currency has had on consumer
prices.

He reiterated that wage settlements in the order of 9
percent needed to be matched by increases in productivity,
while warning that administered prices also posed a threat
to inflation.

Arthur Kamp, an economist at HSBC, had expected a 100
basis point cut but was satisfied with the reduction given
that domestic demand was so robust.

quot;December is the highest retail spending month, and the
Reserve Bank does not want to send out the message that
monetary policy is too loose,quot; Kamp said.

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