The Reserve Bank may be forced to raise interest rates for the fourth time this year in the wake of higher-than-expected producer inflation, says Dawie Roodt, chief economist at PLJ Financial Services.
Statistics SA announced on Wednesday that the producer price index for July rose to a yearly rate of 15,2%, from 14,4% in June.
“The PPI figure came as a shock,” says Roodt. The sharp increase reflected local prices, particularly for food, and imports, driven by factors such as the price of oil.
“The figures show that the supply side of the economy is still under inflationary pressure.”
Roodt believes the latest PPI signals that the Reserve Bank will hike interest rates at its monetary policy meeting in two weeks. The final decision, however, hinges on the money supply figures that are due out on Friday.
Of particular interest is the private-sector credit extension figure, a measure of how much individuals continue to borrow, despite the three rate hikes this year.
Roodt says that if credit extension grows by more than 12% a year, the Bank will have to raise rates. “If it does not do so, it would be failing in its duty and be irresponsible.”
The advantages and disadvantages of a depreciating currency were demonstrated again this week. Though last December’s momentous 37% slide in the rand has fuelled producer inflation, it has also boosted exports and economic growth.
On Tuesday, Statistics SA reported that the gross domestic product for the second quarter grew by a yearly rate of 3,1%, from 2,2% in the first quarter. Mining and manufacturing exports fuelled most of the growth and their extent will be reported in the Reserve Bank’s quarterly bulletin.
“There is no way a country can fall back on a weak currency all the time,” said Roodt. “But the fact that the economy grows at 3,1% despite three interest rate hikes shows it is doing exceptionally well.”
He highlighted the broad-based character of the expansion, with all sectors registering positive growth.
Reserve Bank Governor Tito Mboweni ruled out the possibility of abandoning inflation targeting by using the escape clause on “exogenous shocks” in the inflation targeting policy. One recent shock was the rocketing oil price. Talking to journalists before the Bank’s annual meeting this week, Mboweni bravely suggested the inflation target could be met this year.
The Bank aims to maintain a core inflation rate of between 3% and 6% this year ad the next, minus mortgage rates. The July core inflation rate ran at a two-and-a-half year high of 9,9%. Roodt says he expects the rate to peak at 10,3% in August, but fears this will probably have to be adjusted upwards in the face of the PPI figures.
Like most analysts, he disagrees with Mboweni and believes the inflation target will “definitely not” be attained this year. With the 2003 target increasingly moving out of reach, Roodt says the economy should focus on lowering inflation, even if the country does not hit the target.
In his speech on Tuesday, Mboweni also voiced grave misgivings about the creation of a single financial regulator, an idea first mooted by Minister of Finance Trevor Manuel. Manuel wants a “super regulator” to govern the accounting, banking and financial services sectors.
Taking aim specifically at banking supervision, Mboweni noted that this was a complex function that required timely and decisive action, and should “remain within the Reserve Bank”.