High inflation expectations among producers and consumers are one of the key threats to the South African Reserve Bank’s (SARB) inflation target, according to SARB Governor Tito Mboweni.
Addressing journalists following his presentation to Parliament’s portfolio committee on finance in Cape Town on Friday, Mboweni said the SARB still had much to do to conquer inflation expectations in the country, which at between 8% and 9% were currently far higher than the inflation target of between 3% and 6% CPIX (headline consumer inflation less mortgage costs).
Earlier he said he expected CPIX to fall within the target range before the end of 2003 and, should the SARB remain vigilant and other role players also do their jobs, the inflation rate could remain below 6% in 2004 and through the first half of 2005.
“Inflation expectations are one of our main problems — they are absolutely central to the targeting process,” he observed. “Unlike the United States, United Kingdom and Europe, where they have really conquered expectations [in Europe they are between 1,7% and 1,9%, less than the central bank’s target of under 2%], we still have a lot of work to do in this regard.”
Mboweni noted that one way of lowering inflation expectations was to make progress around the issue of administered prices, or prices under the control of government and parastatal bodies such as utility and housing-related charges.
However, he said he had been trying to get the government’s cooperation on the issue of cost increases over the targeted rate of 3% to 6% for the past five years, and was now “tired” of discussing the subject.
Meanwhile, he said, another risk factor to the SARB’s inflation target was the possibility of rising oil prices following the announcement of oil production cuts by Opec member-countries, given South Africa’s dependence on imported oil.
Other risk factors included the drought in the Limpopo province and the late winter rains in the Western Cape, which could spark food price rises.
On the positive side, the imported component of inflation appeared to be subdued, he said, due to subdued global inflation and economic growth, the strong exchange rate of the rand and the oil price remaining below $30 per barrel.
Mboweni also said the SARB will continue to purchase US dollars in the market in order to continue to build up the country’s foreign exchange reserves.
He said the SARB would continue with its so-called policy of “creaming off” dollars in the market whenever it had the opportunity to do so.
“Our intent is not to affect the exchange rate of the rand, but to manage our foreign exchange reserves,” Mboweni said. “We are beginning to build positive reserves for the country and we will continue to do this.”
South Africa’s net open foreign currency position improved from an oversold position of $1,6-billion at the end of December 2002 to a positive position of $1,4-billion at the end of August 2003. The SARB’s gross gold and other foreign exchange reserves stood at $7,8-billion at the end of August 2003. — I-Net Bridge