OWN CORRESPONDENT, Basel | Monday 10.30am.
RESERVE Bank Governor Tito Mboweni said on Sunday that local interest rates may be on the rise to beat back recent price increases and that South Africans need to fasten their seatbelts as the central bank firmly set its sights on reaching its 3% to 6% 2002 inflation target.
”I don’t know if there will be a rate increase but figures seem to suggest that inflation expectations are picking-up and so consumers must ready themselves…I’m just saying watch out,” he said on the sidelines of the Bank for International Settlements’ annual meeting which formally opens on Monday.
”We are very determined that whatever happens we will reach the target. It’s the first time we’ve had one, and we must reach it,” he said.
Boosted largely by steep global oil prices and the weaker rand, which raises the cost of imports, the targeted inflation measure, known as CPI-X, rose 7,8% in the year to April, while producer prices leaped by 10,1%, their highest level in ten years.
The prospect that South Africa might have to raise interest rates to hit the inflation target, despite a sputtering economic recovery, lead to speculation last week the Reserve Bank was on a collision course with Finance Minister Trevor Manuel, who has said the government’s top priority was to spur growth and create jobs.
But Mboweni said such speculation is overdone. ”Manuel feels he has been grossly misrepresented,” Mboweni said. ”Of course as a central banker I am concerned about growth, but I have no growth target, I have an inflation target, which has been set for 2002, and may be changed after that, but until then is sacrosanct.”
Mboweni played down recent volatility in the rand, which hit a year low of R7,2 to the dollar on May 20, some 16% down on the year, and said the central bank is more focused on the trade weighted rand, which is down just some 6% this year.
”We are targeting inflation, not the exchange rate, although we are concerned about second round effects of the exchange rate on inflation,” he said.
Mboweni did say that currency movements fed through to prices after a three month lag, while interest rate hikes took some 18-24 months to filter through. That means rate moves to hit South Africa’s 2002 inflation target will have to be taken soon.
Part of the rand’s weakness against the dollar this year has been due to problems in neighbouring Zimbabwe; part to the strong dollar; and part to a sense that global growth is topping out, and so too commodity prices, as the US moves to cool its economy with interest rate hikes. But auspicious signs last week the US economy may be slowing led to a bounce in the euro, and Mboweni said that a stronger euro usually led to a stronger rand. — Reuters