The SA Reserve Bank kept interest rates unchanged on Thursday, but warned of risks posed by rising inflation.
”The deterioration in the inflation outlook cannot be ignored,” the central bank’s Monetary Policy Committee (MPC) said in a statement.
”The increased risk of possible pass-through leading to pronounced second-round effects on CPIX inflation must inform policy going forward.”
The SARB kept the repo rate, at which it lends money to commercial banks, at seven percent in the absence of conclusive evidence of pass-through effects at present.
But the MPC would continue monitoring inflation developments, and take appropriate action to ensure CPIX (consumer inflation minus mortgage costs) remained in the target range of between three and six percent, the statement said.
CPIX has been within the target range for the past two years, but has risen by 1,3% points since the MPC’s last meeting in August –largely due to high international oil prices.
CPIX was measured at 4,8% in August, but was expected to remain within the target range for the next two years. The upper turning point was expected to occur in the first two quarters of next year at a level just below six percent, the statement said.
”Thereafter, CPIX inflation is expected to resume a moderate downward trajectory.”
The longer the current upward trend and the volatility of oil prices persisted, the more likely they were to impact on inflation expectations and feed through to other prices.
”Monetary police has to remain vigilant in anticipating such developments.”
Crude oil prices reached new record levels of nearly $70 per barrel in recent months — contributing to domestic petrol price increases of 29 cents a litre and 12c/l in September and October respectively.
Crude oil prices recently declined to below $60 per barrel. If this trend continued, a moderate decline in petrol prices was likely for November.
”However, the volatility of international oil prices means that significant upside risk remains.”
Other risks to the outlook included a deterioration in inflation expectations — which impacted on price and wage formation processes.
CPIX was expected to average 5,2% next year and 5,4 in 2007, up 0,3% and 0,4% from previous estimates, the statement said.
Domestic demand showed few signs of moderation, and impacted with high oil prices on the country’s trade deficit — which was expected to widen in the third quarter of the year.
Vigorous domestic demand, shown in record car sales in September, was financed by increased borrowing and a rise in the household debt ratio.
Household debt as a percentage of disposable income rose from 60% in the first quarter of the year to 62% in the second.
”However, because of the low nominal interest rate environment, debt servicing cost as a percentage of disposable income remained unchanged at a relatively low level of 6,5%.”
Total domestic credit extension grew by 18% in July and 18,3% in August. Increases in mortgage advances reached 26% in August.
”The latter reflects continued buoyancy in the housing market, although the increase in house prices has fallen steadily since September 2004.”
World inflation was expected to be negatively affected by higher oil prices, averaging 3,7% next year — up from the International Monetary Fund’s April forecast of 3,1%.
”Nevertheless, this is lower than the revised 3,9% average expected for 2005 and indicates that world inflation appears to be well contained.”
It was not all bad news on the inflation front, the statement said.
There was no evidence of worsening inflation expectations impacting on wage settlements. Unit labour costs in the first half of the year increased at rates within the inflation target range, measuring 4,6% and 5,3% in the first two quarters.
The exchange rate of the rand, although depreciating by 0,3% since the MPC’s last meeting, has been relatively stable.
The committee referred to continued robust economic growth, partly due to a stronger manufacturing sector. This translated into about 84 000 jobs being created over the past year. – Sapa