As expected, the Reserve Bank raised interest rates by 50 basis points on Thursday. This followed last week’s news that CPIX, the main measurement of consumer inflation, had breached the upper limit of the target band in April.
CPIX (consumer inflation less mortgages) reached 6,3% year-on-year in April, the first time it has breached the bank’s 4% to 6% inflation target in 44 months. The increase was driven mostly by food and transport inflation, and was higher than expected by market commentators and, Reserve Bank Governor Tito Mboweni admitted, also higher than the bank’s forecast.
Mboweni struck a hawkish tone in his address. ‘The breach of the target is in the past, but we cannot ignore the impact of this breach,†he warned, referring to inflation expectations. He said that even if food and petrol increases were stripped out, CPIX would still have risen by 4,6% in April. High rates of household expenditure, as shown by credit extension to the private sector, remained a concern.
The bank’s most recent forecast sees the inflation outlook deteriorating further. According to the forecast, CPIX will remain high for the next quarter, with a technical decline in the third quarter, and will rise again for the following two quarters. He said CPIX was expected to peak at 6,3% in the first quarter of next year.
Asked whether the bank felt it had failed in its mandate because of the breach, Mboweni said: ‘There is no feeling of having failed at all. There is a feeling we have been very successful in our task.†He said food and oil prices had increased globally and that many central banks had also seen inflation targets breached.
But Eskom’s proposed electricity tariff increases were of concern. ‘If the rates they are asking for are to be implemented, then we are going to have a very high CPIX rate. I hope we can find a more creative funding mechanism.â€
Electricity prices are part of the administered prices index, he explained, and the increase would give the bank a ‘serious run for our moneyâ€, he told journalists.