South Africa’s targeted inflation is not expected back in the 3% to 6% band before the end of 2009, and there are significant upside risks to this forecast, South African Reserve Bank Governor Tito Mboweni said on Tuesday.
The Reserve Bank has raised its repo rate by 450 basis points to 11,5% since June 2006 to try to tame inflation, but price pressures continue to build, driven initially by food and fuel costs.
The key CPIX (consumer inflation less mortgage costs) gauge accelerated to a five-and-a-half-year high of 10,4% year-on-year in April, raising chances of more hikes.
Mboweni said in a prepared speech, published on the central bank’s website, that food and fuel costs were the main contributors to inflation, but pressures had become more generalised in recent months.
”According to our most recent forecast, inflation is expected to persist above the inflation target of 3% to 6%, and is not expected to return to within the range before the end of 2009,” he said.
”Unfortunately, we see the risks to this forecast to be significantly on the upside.”
Exporters were likely to continue to face an environment of rising costs and high interest rates in the short term.
”We remain committed, however, to bringing inflation down to within the target range in the medium term,” Mboweni said in a speech to fruit exporters.
Aggressive hike
CPIX breached the top end of the band in April last year, driven largely by rising international food and fuel costs.
However, an expected sharp rise in electricity prices is expected to add to price pressures, while inflation expectations are rising sharply and wage demands are higher.
Recent hawkish comments from Mboweni have almost sealed the case for a more aggressive than usual hike in rates next week, with the market looking for a 100 basis point jump — double the previous 50-basis-point increases.
The higher rates are threatening growth, though, with consumer spending cooling sharply, highlighted by contracting retail sales and plunging year-on-year new vehicle sales.
Mboweni said a weaker rand currency had exacerbated the impact of high international fuel prices, which were not expected to subside anytime soon.
”This is clearly not good news for anyone except those who are making massive profits … we in South Africa have the additional impact of movements in the rand exchange rate, which has exacerbated the impact.”
Domestic petrol pump and diesel prices — calculated monthly on the change in oil prices and the rand — are to rise by 5% and 7% respectively from Wednesday, bringing hikes this year to 33% and 49% respectively.
Mboweni said it was a fallacy that a weaker rand was in the long-term interest of the export sector.
”A weaker exchange rate is usually a sign of high inflation, and unless the inflation problem is addressed, it can set in motion an exchange rate and inflation spiral.”
A weaker currency could only benefit exporters if it was not offset by cost increases, he said.
Mboweni also said that poor South Africans spend 50% of their income on food, making them particularly vulnerable to rising food prices.
”South Africa is dealing with a problem of food affordability, rather than food availability,” he said.
”Internationally, concerns currently focus on the availability and prices of food, and in particular of basic staple commodities such as maize and rice.”
Mboweni said food prices increased at a year-on-year rate of 15,9% in April.
”This has serious implications for poor people and the unemployed, as their spending on food as percentage of total spending is much larger than is the case with the middle- and high-income groups.
”Food accounts for more than 50% of the spending basket of the low income group.” — Reuters, Sapa