Underlying inflation pressures in South Africa’s economy, even after stripping out higher food and fuel costs, are strongly on the upside, central bank Governor Tito Mboweni said on Thursday.
Speaking at a dinner in Johannesburg, he also warned that if proposals for a sharp increase in electricity tariffs are approved, inflation could be pushed even higher, pointing to risks interest rates may have to rise again.
”If you strip out oil and food now, we see inflation is still strongly on the upside … indicating to us that there are strong inflationary pressures in the economy,” he said.
The Reserve Bank hiked its repo rate 50 basis points to 9,5% in June, adding to 200 basis points worth of increases in 2006, and most analysts see another rise this month.
The bank’s monetary policy committee meets on August 15 to 16.
Mboweni also said the breach of South Africa’s 3% to 6% inflation target should not be seen as failure of monetary policy, although the central bank had to convince markets it was serious about bringing inflation back down.
”The challenge for monetary policy is to ensure that inflation is brought back to within the target range, and also to convince the markets that we are serious about this,” he said in a written copy of his speech.
Credit ‘uncomfortably high’
Targeted CPIX inflation stayed outside the band for the third consecutive month in June, after breaching the upper end for the first time in nearly four years in April.
The surge in inflation is largely due to higher oil and food prices, factors outside the control of the central bank.
Mboweni said while there was nothing monetary policy could do about the breach of the target and first-round effects of oil and food costs, the bank could not be complacent.
Household consumption also remained a concern.
”Credit extension to the private sector has been growing at rates of around 26% despite the tighter monetary stance. These are uncomfortably high levels and I have expressed my concern in this regard on various occasions,” he said.
Faster growth in Africa’s biggest economy has been fuelled by robust, credit-driven consumer demand over the past three years, but demand has added to inflationary pressures.
Credit growth edged up to 24,92% year-on-year in June, in spite of a new credit law clamping down on credit providers coming into force in that month.
Mboweni said the National Credit Act may have a dampening effect on credit extension but did not replace the need for monetary policy restraint.
He also criticised proposals by electricity utility Eskom to raise tariffs by 18%, saying this could push inflation higher.
”[If accepted], that immediately influences the inflation process and pushes inflation higher than what would have been the case, and in the process that might force the hand of the MPC.”
But Mboweni added that recent real wage settlements that had exceeded the inflation target in nominal terms did not appear significantly higher than in the past, and, although a risk, did ”not appear to be out of control.” – Reuters