General price pressures are evident in the South African economy, which is growing above its potential, Reserve Bank Governor Tito Mboweni said on Tuesday. Mboweni also told students in the northern city of Polokwane that interest rates were the only tool to tame generalised inflation, raising the possibility that rates may have to rise further this year.
”Even if we remove food and petrol, our inflation is still above the target,” he said.
”There is nothing we can do about the high prices of food and petrol, but our mandate is to keep inflation within target, and interest rates is the tool to tame inflation.”
The Reserve Bank raised its repo rate by 50 basis points to 10% last week, bringing hikes to three percentage points since June last year as it tackles inflation above its 3% to 6% target range, and stubbornly high consumer spending.
Targeted CPIX (consumer inflation less mortgage costs) inflation stood at 6,4 p% year-on-year in June, the third consecutive monthly breach of the band, and the central bank has forecast the measure will stay outside the range until 2008.
Mboweni said high inflation did not help create jobs — countering criticism from South Africa’s trade unions, who have demanded an end to inflation targeting.
”Higher inflation does not lead to job creation — our neighbour [Zimbabwe] is an example. Lower inflation can lead to lower interest rates, which leads to faster economic growth and therefore job creation. So we will stick with our mandate,” he said.
Northern neighbour Zimbabwe is struggling with official inflation of about 4 500% amid an economic crisis marked by chronic shortages of fuel and food and unemployment estimated at more than 80%.
Mboweni warned South Africa’s economy was currently growing above potential, which was adding to underlying inflation.
”Our potential output is 4,5% a year [but] we are already growing at 5%. That is far above potential and that is why we have inflation. Our growth is inflationary.”
Africa’s biggest economy expanded by an annualised 4,7% in the first quarter compared with the previous period after expanding 5,6% in the last three months of 2006.
Growth for last year as a whole was 5%, just off the previous year’s more than two-decade record.
Statistics South Africa will release second quarter gross domestic product data next week. — Reuters