/ 26 October 2005

Mboweni: Oil won’t cause inflationary spiral

The South African Reserve Bank (SARB) will not allow the impact of high oil prices to develop into an inflationary spiral, SARB Governor Tito Mboweni warned on Tuesday night.

Speaking at the Bond Market Spire Awards, Mboweni said that with international crude oil prices recently moving to record-high levels of about $70 per barrel, fears had been cast in the marketplace about future inflationary pressures.

But he added: “As noted before, the immediate or first-round effects of rising energy prices would have to be accepted; however, monetary policy will not allow this to develop into an inflationary spiral.”

He said the SARB will continue to honour its mandate as enshrined in the Constitution and give explicit content to the CPIX (consumer inflation less mortgage costs) rate target range set by the government.

“The bank’s inflation forecasting model shows that CPIX inflation is expected to remain within the target range, reaching an upper turning point of just below 6% in the first two quarters of 2006 and resuming a moderate downward trajectory thereafter.

“As noted in the MPC [monetary policy committee] statement, the bank will continue to monitor the inflation outlook and will not hesitate to respond to any signs of second-round inflationary pressures,” Mboweni added.

He added that the exchange rate cannot be disregarded as this is one of the variables that could have a pronounced effect on inflation.

“That is why we would prefer a relatively stable exchange rate for the rand. Too much volatility creates adjustment costs, which can prove to be quite painful and render entire sectors uneconomical and others extremely viable within a very short period of time.”

The nominal effective exchange rate of the rand has depreciated by approximately 6% since the beginning of the year and has been relatively stable over the period. — I-Net Bridge