Business Report on IOL in article by Ethel Hazelhurst reports:

“Johannesburg – Financial markets are reflecting expectations of a further increase in the Reserve Bank’s official repo rate after a 50 basis point increase to 9.5 percent this month. And a round of interest rate increases is expected globally over the next few weeks.

Ian Cruickshanks, the head of Nedbank Capital’s strategic research unit, warned yesterday: “Interest rates will rise further and remain higher for longer than is generally expected”.

He said rising prices were “underpinned by capacity constraints, which make it difficult to increase supplies of goods and services to meet rising international demand. There is no way to increase capacity in the short term, so there is no alternative but to raise rates to cut demand in order to fight inflation.”

His comments came ahead of a series of central bank meetings, starting with the US Federal Reserve’s Open Market Committee tomorrow and on Thursday.

They followed a warning from the Bank for International Settlements on Sunday about the inflationary dangers of high levels of liquidity and too low interest rates that allow inflation to take off.

In South Africa, with key inflation data due tomorrow and on Thursday, money and bond market rates are ratcheting up. “Forward rates have moved 46 basis points, discounting a further 50 basis point hike within the next two monetary policy meetings,” said Cruickshanks. “And the benchmark R157 [government bond], which matures in 2015, has gone from 7.55 percent in the middle of May to 8.3 percent.”

He said that globally, real interest rates – nominal interest rates minus inflation – were still encouraging credit growth. “As a result, inflation is rising more sharply and on a more sustained basis than expected.”

After earlier expectations of a cut in the US federal funds rate, all 107 economists surveyed by Bloomberg News predicted that it would keep its target for overnight bank lending at 5.25 percent. Cruickshanks said there was “a rising risk the next move could be higher rather than lower”.

Next week the Bank of England and the European Central Bank (ECB) will announce their interest rate decisions, followed by the Bank of Japan the following week.

The Bank of England kept its key rate steady at 5.75 percent earlier this month, while the ECB raised its benchmark refinancing rate to a six-year high of 4 percent.

Both are expected to hike rates next week. But there is less certainty about the Bank of Japan’s key lending rate, now at 0.5 percent. “Japan’s inflation is still negative,” said Standard Bank economist Elna Moolman. In other words, prices are falling in Japan.”