April 7th, 2008

CNY: CP set at historical low of 7.0020
HKD: overnight rates remained below 1% with abundant liquidityl Joseph Yam reiterated USD peg, cited study that if USD depreciates 10% will only raise prices 0.82% in short-term, 1.61% in medium term

SARB should hike:
- Price pressures spilling over to ex food and fuel (at 9.4% in Feb has been above 3-6% for over 10 consecutive months)
- Electricity and fuel will rise in 2008
- lower risk appetite will make c/a deficit funding more difficult
- economy has shown resilience to Eskom showck, grew at 5.3% in Q407
- rhetoric has been hawkish, on 03Mar Mboweni said consumers need to tighten their belts

Reasons not to hike:
- consumer demand is weak, especially with job cuts in the manufacturing and mining sectors
- Inflation is not demand-driven (mainly by food and fuel)
- Credit and liquidity growth has decelrated; previous rate hikes have taken effect
- impact of power crunch on economy is still uncertain
=> should be a rather short tightening cycle, limited to 50-100bps over the course of 2008

political implications = SACP and left leaning elements of ANC dont want rate hikes, with Zuma elected, critics of SARB have more voice, to shore up support ahead of August corruption trial, should be more anti-SARB