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13 Nov 2007 08:35
If the South African Reserve Bank (SARB) is consistent, then inflation matters have deteriorated since October and another rate hike can be expected in December, according to Dr Azar Jammine, director and chief economist of Econometrix.
However, Jammine on Monday also criticised some of the thinking in this regard.
“One of the reasons our economy is expected to slow is the rise in interest rates. We are actually in the minority of countries raising interest rates in the last six to nine months,” he said.
He noted that in the second quarter, household debt as a percentage of income slowed down.
“New-vehicle sales are softening after three to four years of wonderful growth. As are durable goods—with cars, appliances, furniture, the big-ticket items that tend to be bought on credit. It especially impacts on the so-called ‘black diamonds’. It is starting to play a role.”
He added: “Growth in mortgage advances slowed down a little, but not significantly.” The reliability of these figures could be questioned—“but we’re told there is an administrative lag”.
“The SARB, however, sees this little slowdown and says it’s not enough to stop raising interest rates further,” he said.
Durable-goods consumption growth could fall from 3,1% in 2007 to -2,2% in 2008, this from 15,5% in 2006.
“One sector that I find worrying is manufacturing production—September showed the first negative growth in nearly four years,” he said.
September and October cement sales were at their lowest levels in three-and-a-half years. “There is some slowdown and this is clearly linked to the building industry,” he said.
Jammine said he is not as optimistic as the SARB that inflation will move back as quickly to the middle point of the 3%-to-6% target range. However, he said the bank will highlight plenty of evidence as reasons to raise rates again now.
“The main cause of rising inflation is the huge increase in food prices. There has been an extraordinary rise in the price of wheat—it doubled in the last year and therefore bread is going up, and fodder, and therefore vegetables and fruit prices are rising sharply.
“One thing the SARB hasn’t highlighted is a drop in the last few weeks—that there are signs of hope—but we are not told about that,” he said.
“Oil thus far from last year is not such a bad story, but in the next few months for purely statistical reasons we’re comparing against a lower figure and the year-on-year rate will be higher over the next few months.
“That will cause CPIX to rise to between 7,5% and 8% in the next three months. That will be used as an excuse by the SARB to raise interest rates further in December,” said Jammine.
He adds that the SARB’s December inflation forecast will show a sharp deterioration compared with the current forecast and will be another factor likely to be used by the bank in raising rates.
“They are still working with inflation forecasts prior to the October meeting and therefore still not really incorporating the worse inflation forecasts of the last few months. They will get quite a shock and will say they are raising further—that is if they remain consistent.”
Another important factor is that Eskom is raising electricity prices. However, he said he doubts whether this should be used as a reason to raise rates.
“The problem is the Governor [Tito Mboweni] keeps justifying they are raising because of higher oil and food, but then he says there is a lot of evidence that underlying inflation is rising. I say: Where do you get that information from?”
Jammine said that when he plots inflation excluding food and oil, he sees it stabilising. The implication is that the SARB is raising rates because of food and oil.
“The SARB hasn’t answered my question [on inflation excluding food and oil rising]—I think yes, in the longer term it will rise, but in the shorter term it is easing.
“Our own view is that inflation in the next few months will rise further, but then come all the way to 5%—due to statistical reasons—by the latter part of next year. Our view differs in that in the build-up to 2010 there will be just a frenetic drive to the 6% growth mark and it is bound to push inflation up.”
Jammine concluded that there will not be much scope for interest rates to come down in the next few years.
“Maybe by 0,5 percentage points later next year, but due to the prognosis to 2010 I don’t see it coming down to 2004-2006 levels.”—I-Net Bridge
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