Despite turmoil in international markets, the Reserve Bank’s monetary policy committee (MPC) raised interest rates another 50 basis points on Thursday, bringing the repo rate to 10% and the prime rate to 13,5%.
”The MPC noted that recent financial market developments in some of the developed economies have had spillover effects on emerging markets including South Africa,” it said in a statement. It added that a number of central banks had responded to the turmoil by injecting liquidity into their banking systems, but said that its own focus was to ensure inflation returned to within the target range of 3% to 6%.
Year-on-year inflation, as measured by the consumer price index for urban areas excluding mortgage bonds (CPIX), increased at a rate of 6,4% in May and in June, following an increase of 6,3% in April. Once again, food and energy were the chief culprits, but the bank said broader underlying pressures were also evident.
If food and energy prices were excluded, CPIX inflation would have measured 4,6% in May and 4,7% in June, compared with 3,8% in December 2006. This indicator had been rising consistently since the middle of 2006 when it measured 2,5%, according to the MPC statement.
Food prices increased at year-on-year rates of 9% and 9,4% in May and June 2007, respectively. Petrol prices increased at year-on-year rates of 13,7% in May and 11,1% in June as a result of a cumulative increase of R0,57 per litre in these two months, said the statement.
Prices of services, which tend to adjust more slowly than those of goods, have also been displaying an upward trend, having increased at a year-on-year rate of 5,7% in June, compared with 4,6% in January 2007. The higher inflation trend is also observed in administered prices excluding petrol, which have increased at rates of around 5,5% since October 2006. Price declines in clothing, footwear and furniture continue to reduce pressures on inflation.
The bank said producer price inflation had remained high, but after rates in excess of 11% in the previous two months, it had declined to a year-on-year rate of 10,4% in June.
It said its most recent forecast showed that inflation would deteriorate further in the short term. CPIX is expected to remain above the upper level of the inflation target range at an average of around 6,3%, before declining to within the inflation target range in the second quarter of 2008. It is then expected to follow a downward path, reaching around 5,1% by the end of 2009. This higher trend forecast resulted from revised assumptions for international oil prices, but a worse-than-expected second quarter had raised the starting point of the forecast.
Oil and food prices, along with high rates of household consumption expenditure, remain as upside risks for inflation. Increased wage settlements had also given concern. The bank said there was little evidence of a sustained slowdown in household consumption expenditure growth. Consumer confidence remained at near record levels and retail sales growth was robust despite a slight decline. The bank said it was premature to assess the impact of the National Credit Act, introduced in June.