Mboweni’s Xmas present

Reserve Bank Governor Tito Mboweni announced yet another interest rate hike of 50 basis points on Thursday, in an unwelcome blow to consumers.

This brings the repo rate — the rate at which the Reserve Bank lends to other banks — to 11% and prime to 14,5%.

Pressure from food and energy prices is expected to persist in the coming months. At the same time, previous rate hikes were ‘probably” beginning to have an impact on household consumption and this would help moderate inflation over time, says a statement from the bank’s Monetary Policy Committee (MPC). ‘The MPC however, has to ensure that the short-term impact of higher inflation does not allow inflation expectations to become entrenched at higher levels.”

According to the statement, there is some evidence that other components of the inflation basket may be moderating. ‘If food and petrol were excluded, CPIX inflation would have measured 4,8% in October, compared to 5% in July and August 2007,” the statement says.

Electricity prices, in particular, pose a significant risk to the inflation outlook. Eskom has asked for a tariff increase of 18% next year, but appears likely to be granted around 14%.

‘It would help a lot if administered prices, including electricity, were meeting the range. It doesn’t help if some component of the government system goes against what was agreed, and the consequence is that monetary policy must tighten further,” says Mboweni.

The probability of inflation being within the target range will be zero for the first quarter next year, before slowly rising to 67% in the fourth quarter, the governor says.

CPIX inflation remained outside the target range for the seventh consecutive month, reaching a four-and-a-half-year high of 7,3% in October 2007. The bank now expects it to peak at 7,8% in the first quarter of next year.

Food price inflation has continued to accelerate, measuring 12,4% in October. Most of the food categories in CPIX recorded double-digit rates of increase, with the main contributions coming from grain products, milk, cheese and eggs, and vegetables. Meat price inflation, however, declined to 6,6%.

Petrol prices increased at a year-on-year rate of 12% in October following moderate increases in the previous three months.