High food and fuel costs in South Africa have spilled over into second-round inflationary effects that have to be tackled, Reserve Bank Governor Tito Mboweni said on Tuesday.
He also, again, warned in an interview with CNBC Africa that an excessive increase in electricity prices will have serious consequences for inflation.
The targeted CPIX (consumer inflation less mortgage costs) inflation gauge jumped to a five-year high of 10,1% year-on-year in March, raising speculation that interest rates may have to rise again.
The data came out last week. Earlier this month the Reserve Bank lifted its repo rate by 50 basis points to 11,5%, adding to eight half-percentage point increases since June 2006.
Mboweni said the bank’s central forecasts had showed inflation getting worse before it got better.
”So, it was very important for the monetary policy committee [MPC] to have to tighten the monetary conditions in order to ensure that going forward inflation does come down,” he said, referring to the April 10 rates decision.
Mboweni said high international food and oil prices had been the spark for higher inflation, but pressures were now more widespread.
”Food and oil have been the original sins … [but] the impact of the increases in the prices of food and oil have now spilled over into the other categories of the inflation basket, second-round effects.
”The central bank has to try to ensure that these second-round effects don’t get out of control.”
Consumer demand needed to be dampened further and inflation expectations, which rose sharply in the first quarter of the year, had to be contained, he said.
‘Serious consequences’
The central bank’s tightening policy has cut into household spending, one of the main drivers of faster economic growth, but inflation continues to accelerate.
Some analysts have warned that further rate hikes could damage the economy, with consumers already battling high prices and interest rates, and a severe electricity crisis.
The power shortage is widely expected to crimp growth this year, and a request from utility Eskom for a 53% real tariff increase to help fund a boost in capacity will add to pressures.
Mboweni said other ways should be found to fund Eskom’s capital-expenditure programme.
”In the event that the electricity tariffs rise above what we would consider normal, the inflation consequences are quite serious.”
This, together with wage settlements, were issues that the policy committee would monitor closely, he said.
South Africa’s energy regulator will decide on the Eskom request in early June, a week before the next scheduled interest-rate decision.
Mboweni said last week the MPC did not have to wait for set meetings to make changes to its monetary stance. — Reuters