South African central bank chief Tito Mboweni warned on Friday inflationary pressures were ”more worrying”, hinting interest rates may have to rise again in Africa’s biggest economy.
The Reserve Bank governor told Parliament’s finance committee that rates were the only way to rein in inflation.
The bank raised its repo rate by 50 basis points to 9,5% in June after CPIX inflation breached the top end of the 3% to 6% target range in April for the first time in nearly four years.
The move ended a six-month lull in the upward cycle and most analysts see another rise at its August 15 to 16 policy meeting.
”The inflation picture is getting a bit more worrying,” Mboweni said.
But ”actions” already taken and future measures should bring the gauge back into the target band by mid-2008.
”We are convinced that the actions we have taken and actions that we might yet take should contribute to bringing the inflation rate within the target range,” he said in reply to a question.
”I am not saying we are going to increase interest rates, but that we might. But most certainly I don’t think we are going to be reducing interest rates.”
Mboweni’s remarks follow his comments late on Thursday that underlying inflationary pressures, even after stripping out high food and fuel costs, were strongly on the upside.
CPIX stayed outside the band for the third consecutive month in June, after the Reserve Bank had previously forecast it to remain too high until into 2008, with a possible technical dip in the third quarter of this year.
The surge in inflation is largely due to higher oil and food prices — factors outside the control of the central bank — but the bank has stressed pressures are becoming more broad-based, with consumer, credit-driven spending uncomfortably high.
Mboweni again urged consumers to curb their spending, particularly as debt service costs rise.
‘People have to be careful’
”You see … the debt service costs increasing quite strongly. That is going to bite. The debt service costs are going higher and people have to be careful,” he said.
Household debt has reached a record 76% of disposable income, while costs to service that debt increased to 9,5% in the first quarter of 2007, from 9%.
Mboweni also dismissed suggestions that the country should try to weaken the rand currency, as put forward by a panel of international advisers as a way to boost exports and economic growth.
”Any attempts to weaken the exchange rate, I think is folly. If today you want to weaken the exchange rate what happens when it gets too weak? What are you going to do? You should also be able to move on the other side, and this is not a good idea.”
He added that he would not make any statement that the rand was ”strong”.
The unit was last trading at 7,07 to the dollar, about 1% weaker than the start of the year but well off its 2006 low of 7,98 touched in October last year. – Reuters
No question of linking Zim dollar to randyn
Meanwhile, Mboweni told MPs that there can be no question of linking the Zimbabwean dollar to the rand.
He told the committee that the matter has not been considered by the Reserve Bank, nor by the Zimbabwean Reserve Bank, nor has it been raised by the Zimbabwean Finance Ministry.
”That discussion does not exist,” he insisted. And he blamed the notion on journalists having taken too long over their lunches.
MPs on the committee however were keen to know whether it would be possible to link the Zimbabwean currency to ours through the Common Monetary Area (CMA), which includes Namibia, Swaziland, and Lesotho.
But Mboweni pointed out that Botswana, the most likely customer for such monetary alignment is not a member of the CMA, although it is a member of the Southern African Customs Union (Sacu).
He suggested that regional integration could start with a central bank being established for Sacu, which other Southern African Development Community countries could join if they can conform to the convergence criteria.
Such criteria would involve a convergence of budget deficits, of inflation rates and other indexes. The moment a country meets the criteria, it can join.
Mboweni indicated that this was what happens with the Euro region, where as the new entrants to the European Union meet the convergence criteria they are allowed to join.
The governor indicated that the current moves to create a central bank for the whole of Africa, are likely to run into trouble. The AU summit decided that the African central bank would be located in Nigeria, and now ”our Nigerian colleagues” are wrestling with the problem of what the convergence criteria might be. He suggested that Zimbabwean inflation is now running at above 5 000% a year, and that the SA Reserve Bank continues to offer their Zimbabwean colleagues help.
But there is little more that can be done. He suggested that that country’s problems are political and can only be solved politically. – Reuters, I-Net Bridge