Broad-based price increases in South Africa’s economy showed there was a problem that needed to be ”handled”, Reserve Bank Governor Tito Mboweni said on Tuesday. Speaking in Johannesburg, he also warned that, in general, faster inflation meant tighter monetary policy.
”Everyone is increasing prices, which clearly shows that there is a problem in the economy that needs to be handled,” Mboweni said.
”It does not take a genius to realise that we are in a tightening phase of monetary policy to dampen demand.”
The Reserve Bank has raised its repo rate by 150 basis points to 10,5% in three stages since June, adding to 200 basis points of increases during the second half of 2006 in an effort to tame inflationary pressures, and robust consumer spending.
But prices continue to rise, and increases are more broad-based than the initial growth in food and fuel costs.
The targeted CPIX measure jumped to 6,7% year-on-year in September from 6,3%, outpacing forecasts and marking the sixth month in a row it has been outside the bank’s 3% to 6% band.
This has raised speculation of another rate hike in December.
Mboweni said CPIX was likely to remain outside the band until mid-2008, with only a 1% probability of its retreating to the range by the first quarter of next year.
The bank was not dogmatic on inflation, but believed its contribution to help lift economic growth was to keep price increases under control.
”When inflation is low, interest rates come down and there are better growth prospects for the country,” he said, adding the economy was currently growing slightly above its potential capacity.
Annualised second quarter growth measured 4,7% in the second quarter compared to the previous three months.
The Reserve Bank has a narrow mandate to keep inflation within its target range, a task achieved for almost four years until the breach in April this year.
”The central bank are not inflation nutters … we do take into account what growth prospects are in the country and employment,” Mboweni said.
”We are flexible but that flexibility must not be understood to mean we are soft on inflation.
Treasury not worried by higher rates
Meanwhile, the Treasury said it is worried about the impact of interest rate hikes and dismissed suggestions it should widen the inflation band as ”crazy”, its director general said on Tuesday.
Treasury director general Lesetja Kganyago also said there was no need to worry about the country’s current account deficit because it was adequately financed by capital inflows.
Some analysts believe the central bank is focusing too much on inflation targeting at the expense of economic growth, and have suggested widening the CPIX target band.
”I think they are crazy. An appropriate response would not be to say let us revise the target band because that would the end of the credibility of the framework,” Kganyago said.
”There is no reason for us to be worried, firstly because the Reserve Bank, by acting in the manner they have, actually assisted in rebalancing growth,” he added.
Kganyago said South Africa’s ballooning current account deficit remained adequately financed.
In its 2007 Medium Term Budget Policy Statement, earlier on Tuesday, South Africa’s Treasury said the deficit on the current account will likely widen to 6,7% this year from 6,5% in 2006 and to 6,9% in 2008, 7,7% the year after and 7,8% in 2010.
”A current account deficit, in itself, is not necessarily a bad thing as long as you can finance it. At the moment, there are enough capital flows to cover the current account deficit so we need not worry for now,” Kganyago said.
He also said there was too much focus on the rand’s trading levels against the dollar, suggesting the priority should be a stable and competitive currency, measured against a wider basket of currencies.
”The fundamental problem is that we tend to look at the dollar-rand exchange rate,” Kganyago said, referring to some market concerns that the rand could be overvalued after its recent strong run against the greenback.
”The appropriate indicator to look at is the real effective exchange rate. The challenge is that of having a competitive and stable exchange rate,” Kganyago said.
”At the end of it we have got to understand that the value of the currency is determined by demand and supply in the market. At times you are not comfortable with what is happening on the foreign exchange market, what can you do?” – Reuters