The Business Day report confirms the expected half a percent interest rate hike and also had some interesting comment from the Reserve Bank governor aimed at commercial banks.

“RESERVE Bank governor Tito Mboweni took aim at commercial banks over the relentless growth in consumer credit yesterday, warning that unless they moved to stop the “madness” he would consider increasing the amount they are required to hold in reserve with the central bank.

Mboweni issued the threat after announcing a hike in the repo rate of 50 basis points, as expected. It was the fourth similar increase since June, bringing the repo rate to 9%.

He said he had met bank CEs recently to discuss the proliferation of credit cards and the methods used to get consumers to use them, “but they didn’t see anything wrong”.

“If it doesn’t stop, the Bank may be forced to do something to sort out the reserves requirement,” Mboweni said.

Record growth in private sector credit extension was one of the factors highlighted by Mboweni that led to the rate hike. He pointed out that it had contributed to a rise in household indebtedness to a record 70% of disposable income in the third quarter. “Clearly there is some madness out there and it needs to be stopped,” he said.

A change in the reserve requirements, in terms of which banks must keep 2,5% of their deposits in cash in an interest-free account with the Reserve Bank, would hit consumers in the pocket, banks said.

Absa finance director Jacques Schindehütte said increasing the reserve requirement would drive up costs, which would “likely” flow on to the customer. As a result, customers would be less inclined to borrow, he said.

However, Schindehütte said that due to the lag between raising interest rates and customers feeling the pinch, normally six to nine months, the move might not be necessary as customers were still likely to feel the effect of the recent interest rate increases.

“I think everyone is concerned with the extent of lending growth,” he said. “We support him in his objective.”

Another senior banker said raising the reserve requirements would be effective only if the costs were passed on in the form of even higher interest rates. “It is quite a drastic step as there is no interest on (reserve deposit) balances in SA, unlike other developed markets,” the banker said.

Mboweni said the Bank’s forecasts showed a “moderate improvement” in the inflation outlook, although inflation expectations, as surveyed for the Bank by the Bureau of Economic Research, had deteriorated.

CPIX (consumer inflation less interest costs on mortgages) was expected to breach the Bank’s 3%-6% target in the second quarter of next year, before slowing to just above 5% by 2008.

Mboweni said the risk to inflation from oil prices appeared to have “abated somewhat”, although it remained a threat.

He announced that the deficit on the current account of the balance of payments had declined to 5,2% of gross domestic product in the third quarter, from a revised 5,7% in the second.

The deficit has been one of the Bank’s main inflation worries because it can cause the rand to weaken if it is perceived as unsustainable. This would push up the cost of imported goods.

The rand climbed to its highest in four months after the announcement, trading as high as R7,02 to the dollar. Economists said this was in relief that the rate increase was not bigger, which could have jeopardised economic growth, and on news of the shrinking current account gap.

They said the tone of the committee’s statement was sufficiently hawkish to suggest rates would continue to rise.”