South Africa’s targeted inflation should remain within its range, but the target could be threatened by adverse developments and a poor response to past monetary tightening, the central bank said on Tuesday.
In its latest monetary policy review, the Reserve Bank said it remained focused on keeping key CPIX (consumer price index excluding interest rates on mortgage bonds) inflation within a 3% to 6% band and would act appropriately to ensure that this mandate was achieved.
”Although inflation has remained within the 3% to 6% target range … and the inflation outlook initially improved in 2007, the perceived medium- to long-term risks to the inflation outlook have remained a concern to the monetary policy committee [MPC].”
These included upside risks from international oil prices and food price trends, as well as a still tentative response to previous monetary policy tightening, although it expected demand to slow in 2007.
The central bank’s MPC kept its key repo rate unchanged at 9% in February and April after 200 basis points worth of hikes last year to tame rising inflation and robust consumer spending.
It will meet again on June 6 and 7.
But Governor Tito Mboweni has warned that the inflation outlook has deteriorated, and said CPIX would peak at 5,9% in the second quarter of 2007.
”Although inflation is still expected to remain within the target range for the forecast period, it is likely to remain close to the upper end of the inflation target range over the coming months,” the central bank said in its review on Tuesday.
”Due to various risk factors, the probability exists that the actual inflation outcome may diverge from the central projection,” it added, citing risks posed by international oil prices and domestic food prices.
Robust increases in the prices of both imported and domestically produced goods also continued to fuel factory gate prices, the report added.
While the MPC had made it clear it would not respond to the first-round effects of ”exogenous shocks” like petrol-price increases, the risk remained that increases in the past months could ultimately pass through to more generalised inflation.
”For this reason, the MPC will watch these developments very carefully, but at the same time the view is that interest rates should not be adjusted each time the international oil price increases or decreases.”
Credit extension by banks to the private sector continued to increase at ”uncomfortably high rates” and together with household consumption expenditure remained a source of concern. There was, however, some evidence of moderation in the growth of interest-sensitive durable goods consumption.
Latest figures from the Reserve Bank showed that credit growth slowed to 24,18% year-on-year in March from 26,18% in February, easing further from a peak of 27,48%.
The report gave no forecasts on the rand, but said the domestic currency had recently been supported by robust investment flows as the country benefited from excess liquidity and low yields in industrialised countries. — Reuters