The South African Reserve Bank said on Tuesday inflation was expected to rise, but that it remained committed to bringing the gauge within target range ”over a reasonable time horizon”.
The targeted CPIX consumer inflation gauge has persisted above the top end of a 3% to 6% range since April 2007, and accelerated to a new five-year high of 10,1% year-on-year in March.
”The inflation outlook has deteriorated since the publication of the previous monetary policy review in November 2007,” the central bank said in a twice-yearly monetary policy review.
”The bank’s current expectation is for inflation to peak in the near term and then follow a downward trend to return to within the target range by the end of 2009.”
The central bank’s monetary policy committee has lifted the key repo rate by a cumulative 450 basis points to 11,5% since June 2006, partly to curb inflationary credit-driven consumer demand.
”The MPC remains committed to bringing inflation back to within the target range over a reasonable time horizon,” the bank said in its review on Tuesday.
It said by the final quarter of 2007 there were clear signs that tighter monetary policy was beginning to impact on demand, but that the economy was faced with a number of exogenous supply-side shocks that were impacting on the inflation outlook.
”Initially, these shocks were confined to oil and food prices, but more recently electricity price developments also compounded the problems,” it said.
”The possibility of further electricity price increases appears the most significant and immediate upside risk.”
Power utility Eskom, struggling to meet rising demand for electricity, has applied to the national energy regulator for a 53% tariff increase to help finance its recapitalisation programme.
Positive regional outlook
The regulator will rule on the application in June.
The Reserve Bank said a 14,2% increase in the electricity tariff already approved in April, the possibility of another rise and a weaker rand currency had worsened the inflation outlook.
”Collectively, despite signs that the economy is responding to the tighter monetary policy stance, these international and domestic developments have contributed to deteriorating inflation expectations and signs of generalised inflation pressures emerging in the economy,” it said.
The bank said the rand had depreciated by approximately 6% against the US dollar since November 2007 and about 25% against the euro, the currency of South Africa’s major trading partner, the euro zone.
Electricity supply constraints may also have affected investor perceptions towards South Africa and ”there appears to be an increased risk premium that investors require for holding the rand”, the Reserve Bank said.
The regional economic outlook remained positive, but tensions over Zimbabwe’s disputed presidential election posed a downside risk.
Electoral officials in Zimbabwe say the main opposition candidate defeated veteran President Robert Mugabe in the March 29 election, but failed to garner enough ballots to avoid a second round vote.
The opposition Movement for Democratic Change insists that it won outright, and that Mugabe manipulated the result to cling to power.
”Africa’s economic outlook remains positive given the continued favourable commodity price outlook, regional macroeconomic stability, rising oil production and continued capital inflows,” the Reserve Bank said.
”The most important downside risks for growth in the region would comprise heightened risk aversion by investors as a result of the tensions flowing from the Zimbabwe elections.” – Reuters 2008