South Africa’s central bank was closely watching whether another round of oil and food price increases widens inflation, and it would take action if this occured, Governor Tito Mboweni said on Wednesday.
”If we see second-round effects coming through it is prudent for the central bank to tighten monetary policy,” Mboweni said in a speech in Cape Town, adding that the central bank considered the impact of recent food and oil price hikes as ”alarming”.
Mboweni said that monetary policy makers had not seen ”much evidence” that further increases in the prices of those items would lead to runaway inflation, although he warned consumers again to cut their debt in the event of higher interest rates.
The central bank warned earlier this month that higher international oil and food prices and robust consumer spending could push inflation through the upper end of its 3% to 6% band — a target the central bank is mandated to protect.
It left its key repo rate unchanged at 9% at policy meetings in February and April after raising it two percentage points in four stages during the second half of 2006 in a bid to control rising prices and robust consumer spending.
Some analysts, however, have forecast a resumption in the upward rate hike cycle when the bank’s monetary policy committee meets again on June 6 and 7.
South Africa’s main CPIX inflation gauge soared to an annualised 5,5% in March — a three-and-a-half year high — on the back of a surge in fuel and food costs. It is widely expected to climb again when figures for April are released next week.
The cost of petrol, which is loosely set by the government, has risen more than 20% since March and another increase is expected at the beginning of June as crude oil prices rise above $70 a barrel.
Spending worry
Frothy consumer spending, triggered by a fast-growing economy and an explosion in access to credit in Africa’s economic powerhouse, has become one of the central bank’s main worries on the inflation front.
”It is fair to say households cannot continue to put themselves in as high debt as they do now. Those who recently graduated into the middle class might find themselves in serious trouble if the interest rate cycle changes,” Mboweni said.
Interest rate hikes have had a mostly muted impact on consumers so far. Retail sales growth jumped to 10,1% year-on-year in March, erasing hopes that spending was easing after slower 8% growth the previous month.
Household debt has climbed to a record 73,8% of disposable income, with credit growth stubbornly high at around 25% year-on-year.
Mboweni said the central bank was monitoring labour negotiations between the government and more than one million unionised public service workers demanding large wage increases.
”We are watching very closely the current wage negotiations because that will also indicate to us whether we are beginning to see some kind of generalised second round effect coming through,” he said.
Trade unions, including the powerful Congress of South Africa Trade Unions, are threatening mass strikes to back their demand for a 12% pay rise, double what the government has offered.
Mboweni also said that the rand, South Africa’s currency, sometimes looked overvalued but was ”okay” most of the time, adding the central bank continued to purchase excess dollars in the market.
”Yes, there are times when the exchange rate may look a little bit overvalued, but most of the time it is okay,” Mboweni added in reply to a question.
The rand weakened slightly to 7,079 to the dollar late on Wednesday evening, compared to about 7,06 before Mboweni spoke. – Reuters