Economic indicators are not giving a clear indication that the Reserve Bank will raise the repo rate at the Monetary Policy Committee meeting in October 2007. The 3-month NCD rate is currently priced at the mid point between the level if a hike of 0.5% occurs and the level when rates remain unchanged. In contrast, bond markets have rallied strongly over the past month, which reflects the view of an unchanged repo rate.

In August CPIX declined to 6.3% year-on-year from 6.5% previously. The monthly increase slowed to 0.3% from 1.1% in July. The increase in food prices was the biggest contributor. The biggest surprise was in PPI, which in August 2007 dropped to 9.4% year-on-year from 10.3% previously. Food price increases at the agricultural level contributed 0.4% of the monthly increase of 0.7%.

Private sector credit growth slowed to 22.9% in August 2007 from 23.1% in July. A decline in other loans and advances caused the slow down as mortgage advances continued to grow strongly by 26.7% year-on-year.

The market is expecting a further rate hike at the next Monetary Policy Committee meeting in August 2007. The 3 month NCD rate has increased to 9.8% and the 12 month NCD rate to 10.6% respectively. The current rate levels have already discounted most of a 50 basis points increase in the repo rate.

CPIX rose by 0.6% month-on-month in May 2007 with fuel and food prices the major contributors. The annual rate of CPIX increased to 6.4%. PPI increased by 11.3% year-on-year and will put further pressure on CPIX over the next few months.

PSCE slowed in May to an annual rate of 24.8% from 25.1%. Mortgages increased strongly by 2.3% month-on-month reflecting a pre-emptive rush before the new credit act comes into effect on 1st June.

The trade deficit in May narrowed to R2.7 billion from a deficit of R5.9 billion in April as exports outpaced imports. A series of smaller deficits is required to improve the current account position.

Although the inflation numbers for CPIX at 4.9% year-on-year and PPI at 9.5% year-on-year in February 2007 were better than expected, the sharp rise in oil prices and higher wheat and maize prices since then will push inflation higher over the 2nd quarter. A sharper rise in electricity costs and municipal services to finance capital spending on new infrastructure is also going to add to upward pressure in the future.

The Monetary Policy Committee decided to leave the repo rate unchanged at 9% at the April 2007 meeting. Over the remainder of 2007 the risk to inflation may still force the MPC to tighten further. Accelerating corporate demand for credit and strong mortgage advances caused PSCE growth to increase by 26.1% year-onyear in February 2007 from 24.8% the previous month. The latest quarterly bulletin of the SARB reported the annual growth of GDP in 2006 at 5% versus 5.1% in 2005. A major difference is that GDE has grown by 8.7% versus 5.9% previously. Fixed capital formation and a build up in inventories contributed strongly over the year. The faster pace of imports growth over exports has subtracted from overall growth.

The Reserve Bank increased the repo rate to 9.5% at the December 2006 MPC meeting. Commercial banks increased the prime overdraft rate to 12.5%. The 3 month NCD rate rose by 5 basis points to 9.10% as the market has already priced in the increase.

There is not yet enough evidence that the increase in interest rates over 2006 has changed the behaviour of consumers significantly. The rate of growth of residential house prices and of car sales has slowed materially over the last quarter of 2006.

In November 2006 the year-on year growth rate of private sector credit was 26.8%, mortgages were 30.4% and other loans were 30.1 %. The expectation is for the growth rates to slow down over 2007 but currently credit demand is still a negative for interest rates.

CPIX inflation stabilized in November at 5.0% year-on-year as food prices increased by a modest 0.3% over the month. The lower petrol price caused transport costs to fall by 1.1% over the month. PPI remain steady in November at 10.0% year-on-year as food price increases at the agricultural level was below expectations.