South African central bank Governor Tito Mboweni warned on Friday of a strong upward bias in inflation beyond high fuel and food costs, pointing to further interest rate increases.
The Reserve Bank raised its key repo rate by 50 basis points to 9,5% on Thursday to help stem surging inflation and high consumer spending, ending a six-month pause in the tightening cycle.
”We are noticing a kind of generalised tendency for prices to rise … so we are seeing generalised price [increases],” Mboweni said in a speech at a breakfast meeting.
He said there was a strong upward bias in inflation if one stripped out both food and oil prices, and repeated an earlier comment that the country may have entered an interest rate tightening phase.
South Africa’s rand currency and government bonds extended losses on Friday in the wake of the rate increase.
The currency touched a two-and-a-half month low of 7,3645 to the dollar and the yield on the short-dated issue due 2010 was last up 19 basis points at 8,84%, adding to heavy losses over the past three weeks.
South Africa’s targeted CPIX inflation measure jumped to 6,3% year-on-year in April — the first time it has pierced the central bank’s 3% to 6% band in nearly four years — and producer inflation climbed further into double digits.
The acceleration was largely due to stubbornly high international oil and food prices — both beyond the control of monetyary policy.
But Mboweni said while high fuel and food costs were likely to stay, price pressures were now spreading across the economy.
‘Madness out there’
The current wage standoff between government and civil service unions was also of concern. Striking workers are demanding a 12% pay rise — double the top end of the inflation target — while the state has offered 6,5%.
”We have to think very carefully about wage and price developments that might push inflation much higher,” he said.
The central bank has forecast CPIX to remain just outside the target range until into 2008, save for a brief dip in the third quarter of 2007.
Mboweni said he would prefer interest rates to be lower but consumers merely used such conditions to overspend.
”Interest rates in South Africa are too high, they are really high. But there is a psychological problem which has to do with the fact that South Africans are not used to living in an environment of low interest rates,” he said.
”When interest rates are reduced then our people go on spending binges … [it’s] madness out there.”
Analysts said the hawkish central bank view on inflation pointed to interest rates rising again in 2007, helping to maintain the credibility of the inflation target.
”The general feeling I get from him, from yesterday and today, is that he is still relatively hawkish on inflation. There seems to be an obvious worry that upwards inflationary pressures are still increasing,” Efficient Group economist Fanie Joubert said.
The central bank left the repo steady at 9% in February and April after lifting it 200 basis points between June and December. With hindsight, some economists say the pause in the rates cycle was premature.
Mboweni also said the current account should stay in a large deficit — it was at 7,8% of gross domestic product in the fourth quarter of 2006 — for the next two or three years, but he was confident that inflows to finance it would continue.
”I have that confidence in the future that there will always be inflows and I’m sure as long as the governor is confident, we should all be confident,” he said. – Reuters