/ 2 November 2006

Mboweni: Easier oil prices still a risk

Lower oil prices have eased inflation risks in South Africa but it remains vulnerable to a rebound in the cost of crude and changes in global-investor sentiment, Reserve Bank Governor Tito Mboweni said on Thursday.

South Africa’s Reserve bank has hiked interest rates by 150 basis points since June to tame rising inflation, stemming from fuel and food costs and robust consumer spending.

The targeted CPIX inflation measure is ticking up towards the upper end of the 3% to 6% percent target range, reaching 5,1% in September. Mboweni said in a speech posted on the central bank’s website that lower oil prices were positive for inflation but warned this should not be taken for granted.

”If sustained, the recent decline in oil prices augurs well for inflationary developments going forward,” he said.

”Nevertheless, given the underlying market conditions and vulnerability of oil prices to geopolitical tensions, these lower prices cannot be taken for granted and oil prices continue to pose an upside risk to our inflation outlook.”

Crude oil prices have fallen about 25% since peaking in July this year, slipping below $60 per barrel early last month and prompting a production cut by Opec. It has traded in a range of $56,55 to $61,79 for the past month.

The fall has helped contain domestic fuel costs despite a fall of 14% in the value of the rand currency against the dollar in 2006.

Petrol-pump prices have dropped by about 15% over the past three months, reversing a key threat to inflation, and should help counter rising food prices and high consumer demand.

The central bank has forecast CPIX — which excludes mortgage costs — to push towards 6% and remain near that level until the second half of 2007, while the National Treasury has warned it could pierce the upper end of the target range early next year.

Vulnerable to sentiment changes

Referring to challenges from international developments, Mboweni reiterated that as an open emerging-market economy, South Africa was vulnerable to changes in international sentiment that often had little to do with domestic economics.

Foreigners are big players in South African capital markets.

Non-residents have bought a net R20,8-billion worth of bonds and R64,7-billion in equities so far this year, Mboweni said.

Those purchases have helped finance a yawning deficit on the country’s current account, which, at more than 6% of gross domestic product, is a risk for investors and has weighed heavily on the currency.

”The appetite for South African financial assets is, to a certain extent, influenced by developments in global bond and equity markets,” he said.

Mboweni said Chinese imports, in particular cheap textiles and clothing, had helped contain price rises in South Africa.

The governor has been at odds with trade unions and the government over plans to slap quotas on Chinese clothing imports from January in an effort to save textile jobs in South Africa.

Mboweni also said that South Africa would not ”slavishly” follow international interest-rate movements, which had largely been on the rise globally, to tame rising inflation.

”Our interest-rate decisions are determined by the domestic inflation outlook,” he said.

The United States paused its cycle of interest-rate hikes earlier this year and investors reckon the European central bank is nearing the end of its own upward rates cycle.

A Reuters poll last month showed the markets expect a further half percentage point rise in South Africa’s repo rate to 9% in December. — Reuters