Persistently high oil prices could cause higher inflationary expectations to become more entrenched, thus increasing the probability of a further tightening of monetary policy, said South African Reserve Bank (SARB) Governor Tito Mboweni on Friday morning.
“High and volatile oil prices pose a significant risk as is clearly evident from recent inflation outcomes in South Africa. Petrol price changes over the past few months have mainly reflected the volatility in international oil prices and exchange rates. Petrol price developments are currently playing an important role in the less favourable outlook for domestic inflation,” said Mboweni.
Mboweni pointed out that geopolitical tensions had renewed in early 2007, thus causing a rebound in the price of Brent crude from around $58 per barrel in January to around $68 per barrel in April and thus underscoring the volatile nature of the market.
“While recent surveys indicate that inflation expectations remain relatively well anchored at levels consistent with the inflation target band in South Africa, we cannot afford to become complacent, vigilance is required of a central bank at all times,” said Mboweni.
He added that commodity price increases were “somewhat of a double-edged sword for South Africa”.
“On the export side, it contributes to increased exports and economic growth. On the other hand, rising commodity prices could offset the positive terms of trade effect and lead to an increase in import prices and hence domestic inflation,” he explained.
Mboweni also pointed out that a further threat to the inflation outlook emanated from buoyant housing markets in many countries, “which have also served to fuel domestic demand”.
“While current indications are that these concerns may have dissipated somewhat, policymakers need to remain vigilant given the impact of asset-price movements on macroeconomic developments,” he added.
He also said that all indications are that domestic capacity constraints have increased recently and when coupled with the narrowing of the output gaps internationally, the impact of these developments on the domestic inflation outlook “requires close monitoring”.
As to the markets he said that so far, financial market corrections have been relatively well contained and brief, even against the background of a slowing United States economy.
“This can most likely be attributed to what appears to have been a rebalancing of global growth and the adoption of appropriate economic policies. With regards to the latter aspect, there is little doubt that monetary policy has been fairly successful in containing inflationary pressures across the globe,” said Mboweni.
“Currently the world economy is characterised by generally strong growth and low inflation. This favourable scenario has also benefited emerging markets, which are now starting to play a larger and more crucial role in the global economy.
“Nonetheless, as we have seen on a number of occasions, markets are susceptible to changes in sentiment. Thus far, negative developments stemming from changes in sentiment has generally been brief,” he added.
However, Mboweni concluded that global imbalances nevertheless remained a challenge, but that “at this stage a disorderly unwinding of these imbalances appears unlikely”.
In keeping the repo rate on hold for the second time running at 9% on April 12, Mboweni had said that while the inflation outlook had deteriorated somewhat since the February meeting, the prices of a number of goods had also declined.
As to risks, he had highlighted oil and food, particularly the high grain prices brought about due to a drought.
South African retail petrol prices rose by 34 cents per litre on May 2, with high international product prices the leading cause. – I-Net Bridge