South African Reserve Bank Governor Tito Mboweni on Tuesday evening flagged as important the upward bias in place in consumer price index inflation to 5% in August 2006 and said that while inflation had remained within the target band in recent months, price pressures had started mounting due to increases in oil, food, sustained consumer demand and the depreciation in the rand.
A link-up between the current-account deficit, the rand and inflationary pressures was noteworthy in his presentation.
He said that the rand had depreciated from the second week of May due to greater caution towards emerging markets, a decline in the gold price, as well as the widening current-account deficit. Mboweni thereby linked the current-account deficit to inflation pressures and highlighted that this, together with rising consumer demand and low savings, needed to be tackled to try and curb inflationary pressures.
“Price pressures started mounting due to increases in oil prices, domestic food prices and sustained strong consumer demand and the depreciation of the rand,” said Mboweni.
“The rand depreciated from the second week of May as a result of greater caution towards emerging-market currencies, a decline in the gold price and the widening current-account deficit,” he added.
Mboweni highlighted that the trade deficit had continued to widen as strong demand fuelled imports.
Mboweni said one of the key challenges going forward was to attract foreign direct investment to reduce dependence on volatile portfolio investment flows.
The South African rand weakened to a fresh 39-month worst level against the United States dollar in opening trade on Wednesday on the back of a fall in commodity prices, with traders expecting the local currency to soon be trading above the R8 per dollar level.
Many South African analysts are now predicting that Mboweni will raise rates by a full 100 basis points at the October 12 rates meeting. — I-Net Bridge