Reserve Bank: CPIX not set to be on target before 2010

South Africa’s key CPIX (consumer inflation less mortgage costs) is unlikely to return to within the 3% to 6% target band before 2010, a senior South African Reserve Bank official said on Monday.

The targeted gauge jumped unexpectedly to a near five-and-a-half-year high of 10,4% year-on-year in April, prompting hawkish comments from Reserve Bank Governor Tito Mboweni that boosted chances of a bigger-than-expected interest-rate increase next week.

Reserve Bank chief economist Monde Mnyande said the main risk to inflation came from food and fuel costs, and an expected rise in electricity prices, but inflation expectations had also accelerated sharply in the first quarter of 2008.

“Given these broad-based inflationary pressures, CPIX inflation is unlikely to return to within the inflation target range before 2010,” he said in a speech posted on the bank’s website on Monday.

Mnyande said the central bank was looking to provide a platform for healthy economic growth to help create jobs and cut poverty.

“It is not in the best interest of the bank to curb activity through painful policy rate adjustments, but to provide a platform, among other agents, for another prolonged and healthy economic cycle,” Mnyande said.

However, high inflation went against the interests of economic growth, and punished the poor disproportionately.

“Upward adjustment of the policy rate does not indicate a deviation by monetary authorities from these goals,” he said.

Mboweni sent markets into a spin last week when he suggested it was possible rates could rise by 200 basis points this month—an adjustment analysts say is excessive and unlikely.

Power crisis

The central bank has already lifted its repo rate by 450 basis points to 11,5% since June 2006, by 50 basis points each time. Markets are now pricing in a full percentage point hike at the next policy meeting on June 11 and 12.

The targeted CPIX gauge has remained outside the band since April last year and price pressures continue to drive it higher, with an anticipated large jump in power prices likely to be announced later this month.

The energy regulator will on June 18 decide on a request from power utility Eskom for a 53% real tariff increase to help it meet rising coal prices and a massive capital-expenditure programme.

Meanwhile, petrol pump and diesel prices are to rise by 5% and 7% respectively this week, bringing hikes this year to 33% and 49%.

“CPIX inflation is likely to remain quite high in the next few months, factoring in the recent trends in petrol prices and the under-recovery of underlying fuel costs,” Mnyande said.

He added that weaker factory output in the first quarter of the year, dampened by an electricity shortage, pointed to a significant slowdown for the secondary sector this year.

The likelihood of below potential output in 2008 was high, although infrastructure spending should help to boost momentum in the medium to long term.

Mnyande also said the current-account deficit—which measured a 36-year record 7,3% of GDP in 2007—would likely remain above 7% in the first half of 2008.—Reuters

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