Consumers were hit with a double whammy on Thursday: the Reserve Bank maintained interest rates at current levels and electricity prices are set to go up by 31.3%.
The Reserve Bank kept the repo rate at 7.5%, leaving the prime interest rate at 11%.
The announcement came on the back of the National Energy Regulator’s decision to grant Eskom a 31% tariff increase, just less than the 34% it had requested. The electricity hike could further slow down the decline in consumer price inflation (CPI), which government has targeted at between 3% to 6%.
CPI figures released this week showed a sluggish fall in the prices of a basket of consumer goods, to 8% year on year, down from 8.4% in April, despite the cooling local economy.
Electricity prices, with other administered prices such as healthcare and education, as well as food price inflation, are some of the main reasons CPI has remained stuck above the inflation target.
In his statement following the meeting of the monetary policy committee (MPC) Reserve Bank Governor Tito Mboweni said electricity price increases are a concern. He appealed to ”colleagues who have influence on administered price outcomes” to help bring inflation down.
Mboweni also highlighted rising oil prices as a threat to the inflation outlook, with increases in wages in excess of inflation.
The MPC announcement follows a week of worrying economic news.
Jobs in the formal non-agricultural business sector shrank by about 179 000 people (or -2.1%) from December 2008 to March 2009.
New Finance Minister Pravin Gordhan told Parliament this week that government is down R10-billion in tax revenue this year.
According to Stanlib economist Kevin Lings: ”We expect CPI inflation still to move back towards the target range during 2009, but the rate of disinflation is likely to be relatively gradual given the still sticky food inflation and high services inflation items such as healthcare, electricity and education.”
Producer price inflation (PPI) — the price of goods at the factory gate — shrank substantially, however, as demand and the prices of commodities have fallen dramatically in line with the global economic crisis.
Lings noted that although PPI has remained below 6% in the past three months and could conceptually improve the outlook for CPI, the reasons CPI remains sticky are more closely related to electricity, education and healthcare inflation.
The South African Chamber of Commerce and Industry said the electricity hike will have a negative impact on inflation. It said increased tariffs will reflect in the final prices of goods and services, slowing or reversing the declines in inflation.
But according to Frost & Sullivan energy industry manager Cornelis van der Waal, the Eskom tariff increase is needed.
”These decisions must be taken in the interests of the country’s economic development, the sustainability of industry and to ensure a reliable supply of electricity. Hiking tariffs now is the best way to support these long-term goals.”
