Mboweni says inflation outlook bleak

The South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) on Thursday decided to increase the repo rate by 50 basis points to 12%.

The prime overdraft rate thereby increases to 15,5% and the current tightening cycle, which began in June last year, goes to 500 basis points.

SARB Governor Tito Mboweni noted that there are major inflationary pressures building up, with the electricity decision to be made next week weighing heavily. He added that the MPC was mindful of the fact that the economy was responding to the tightening, but that risks to inflationary expectations have deteriorated further.

“The outlook for inflation remains bleak,” he said, adding that the risk to the global and domestic economy is seen to be firmly on upside.

He added that price increases are now more broad based.

“Broad-based pressures are intensifying—if food and energy are excluded CPIX is at 6,1%—above the upper limit,” he said.

Mboweni noted that CPIX is now expected to peak at 12% in the third quarter of 2008, but this does not factor in any larger electricity increases than those already granted [December 2007] and CPIX is now not expected to return to target until the third quarter of 2010.

The bank had previously seen a peak of 9,3% in the first quarter of the year.

“This is a result of higher than expected inflation outcomes, a depreciated rand and upward revisions in oil price projections,” said Mboweni.

Mboweni said one of the main risks comes from further electricity price increases, while a further petrol increase in July was a possibility if the current under-recovery continues.

“We do have different scenarios for electricity,” he said.

“We hope the electricity announcement is not too heavy on us and inflation,” said Mboweni.

“We couldn’t sit in the MPC and speculate—we tried to ask but they wouldn’t tell us—we will wait for that [decision on June 18],” he added.

He also said it was a little too early to know if slightly lower agricultural prices would be maintained.

He added that the rand has been relatively volatile and that the related uncertainty poses a risk to the inflation outlook.

Notably, Mboweni said another risk was negative perceptions on the rand due to the current account deficit widening to plus/minus 9% of GDP in the first quarter.

The current account deficit was at 7,5% of GDP in the fourth quarter of last year and at 7,3% in 2007. The second quarter data is due to be released on Thursday next week.

Mboweni did highlight some offsetting effects—such as lower household consumption expenditure which hit an annualised 3,3% in the first quarter of 2008 from 3,8% in the previous quarter and a peak of 9% in the final quarter of 2006.

“There is some evidence house prices are beginning to decline,” he added.

Mboweni said the outlook for the global economy remains uncertain, although there is some “tentative evidence” the worst of the credit crisis may be over.

Mboweni also denied saying that an increase of 200 basis points was possible.

“I did not say it would be that.”

He had previously said that journalists did not understand the difference between “possible” and “probable”.

Mboweni concluded that the MPC had mentioned 100 basis points, although he had not.

“Some people mentioned it, but overall the consensus was 50. There was not much of a debate there. It was not a long debate.”

The market consensus was for a 100 basis point increase, according to I-Net’s survey of leading economists.

Another hike could well be on the way in August, but not of the same stratospheric proportions, added the respondents to that survey.

The consensus there was for a 50 basis point increase, with seven of the nine surveyed on that measure expecting it at 50 basis points. One respondent felt it could be 100 in August as well, but said this would depend on whether electricity prices were hiked by over 15%.

Better than 100
Dennis Dykes, economist at Nedbank, said: “The market had been expecting a 100 basis points increase. It’s a surprise in that sense, but is it good or bad? It’s certainly better than a 100 basis points and we believe that the medicine applied so far is doing the job.”

The Standard Bank economics division said CPIX was well above the upper limit of the inflation target and showed no signs of returning to the target range.

‘Clearly, inflationary pressures are far from receding and several indicators point to further consumer uncertainty around electricity tariffs makes inflation forecasts hazardous, but a target friendly outlook could perhaps materialise only in late 2009.

Jacques du Toit, a senior property analyst at Absa Home Loans, said the affordability of housing, especially for first-time buyers in the low- and and middle-income categories, would be further adversely influenced.

‘Consumers’ spending power has been severely eroded by higher food and fuel prices over the past number of months. In addition to this, the cumulative rise of 500 basis points in interest rates since mid-2006 has caused the average monthly repayment on a mortgage loan to have risen by 35,6%.

“Against this background, levels of activity and price growth in the residential property market are expected to slow down further in the second half of the year and into 2009. In real terms, house prices are forecast to drop for the first time this year since 1999. Mortgage advances growth, currently at 21,9% year-on-year after declining from almost 31% in October 2006, is forecast to continue to slow down towards the end of the year and into 2009 on the back of the interest rate cycle, the impact of the National Credit Act, and a slowing housing market.

Cosatu strike
The Congress of South African Trade Unions (Cosatu) said this week it would intensify strikes is there was increase in interest rates.

The central bank has lifted rates by 450 basis points since June 2006 to help fight inflationary pressures, mainly driven by soaring prices of food and fuel, but which the Reserve Bank has in the past also blamed on credit-driven consumer demand.

Cosatu has demanded that the inflation target either be scrapped or the band raised. - I-Net Bridge, Sapa

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