Global analysts Lehman Brothers said on Friday that they view the surprise 50-basis-point move by SA's central bank as inconsistent with the Bank's own inflation outlook, its mandate and recent rhetoric from its officials.

The South African Reserve Board shocked the market on Thursday by hiking rates by just 50-basis-points against consensus and market expectations of a 100-basis-point increase.

"In particular, it seems to contrast strongly with the governor's own statement [on 28 May] about the need to take 'drastic action' to contain inflation — which the market interpreted as the need for a 100-basis-point hike," said SA analyst from Lehman, Peter Attard Montalto.

In the current cycle, which began in June 2006, rates have now been raised by 500-basis-points to 12 percent, with the prime rate at 15.5 percent.

"The statement following the decision was surprisingly dovish — arguing that while inflationary pressures are real, a number of factors are working the other way, heightening the risks to growth — as was the Q&A with Governor Mboweni afterwards," noted Montalto.

In the statement, the MPC stated that its revised inflation forecast was now looking for a peak of 12 percent in the third quarter, with CPIX not returning to target (three-to-six percent) until the third quarter 2010, but this excluded the Nersa electricity tariff decision next week Wednesday.

"This is an even more bearish inflation forecast than our own — we look for an above-consensus 12.6 percent peak in CPIX with the Eskom tariff hikes. Given such a bearish upward shift in its inflation forecast, we find it odd that the MPC hiked by only 50-basis-points. More surprising to us was the fact that in the two weeks preceding the announcement, other Monetary Policy Committee members mentioned the possibility of a 100-basis-point hike but the governor did not. After all, it was governor Mboweni himself who had initially suggested the chance of a bigger than 50-basis-point hike," added Montalto.

Inflation outlook was 'bleak' and 'deteriorating'

He said although Mboweni did acknowledge that the inflation outlook was 'bleak' and 'deteriorating', he said it was core inflation that was of concern and that inflation expectations were not anchored.

"He spent a great deal of time on discussing the growth outlook, which contrasted sharply with recent speeches about the need for the economy to feel 'a lot of pain' on the growth front to bring core inflation and inflation expectations under control," said Montalto.

The statement highlighted the slowdown in household consumption from 3.8 percent to 3.3 percent year-on-year (previewing next week Thursday's quarterly bulletin), the MPC's view that credit growth is softening and the increase in debt of households to 78.2 percent of disposable income from 77.6 percent previously, as well as the deterioration in PMI, business confidence and investment.

"In sum, we are left, once again, with the impression that the MPC is hiking rates reluctantly in the face of the possibility of a hard landing. We disagree with the notion that the economy is about to experience a hard landing. We judge that inflation will rise further and that inflation expectations will rise even more," says Montalto.

Wage inflation is also likely to rise significantly.

"We judge that the MPC will have to hike by an additional 100-basis-points this year — we expect a 50-basis-points hike in August and another 50 in October, especially as the SARB's forecast takes into account the Eskom tariff hikes," concludes Montalto.

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