Inflation rate breaches Mboweni's 6% ceiling
May 31, 2007
By Tonny Mafu
Johannesburg - South Africa's consumer inflation rate has breached the upper limit of the Reserve Bank's 3 percent to 6 percent target band, making a strong case for interest rate increases next Thursday.
While economists' consensus forecasts had estimated that last month's consumer inflation, as measured by the consumer price index stripped of mortgage rates (CPIX), would reach 5.9 percent year on year, it actually hit 6.3 percent.
It is the first time in 44 months that consumer inflation has broken above the target range. CPIX rose 5.5 percent in March after an increase of 4.9 percent in February.
It averaged 4.6 percent year on year for the whole of 2006.
The Reserve Bank monitors inflation to ensure price stability, and uses interest rate adjustments to rein in price increases.
Nico Kelder, an economist at Efficient Group, said CPIX inflation would remain above 6 percent for the next two to three months. "We expected 6.2 percent."
Kelder expected the Reserve Bank's monetary policy committee to "increase interest rates even though [price] increases are coming from food and fuel".
Razia Khan, an Africa economist at Standard Chartered in London, said: "This the direct result of policy being too accommodative. The Reserve Bank absolutely needs to raise interest rates next week. It can't afford to be complacent."
Governor Tito Mboweni recently said the central bank would not react to fuel- and food-related inflation pressures. There was a 68c a litre increase in the petrol price at the beginning of last month, lifting transport inflation to 4.3 percent month on month, the fastest since 1999. Another 25c increase is expected next month.
Food prices, the major contributor to higher inflation, rose 8.6 percent year on year and 1.2 percent month on month, as the prices of grain and meat firmed on the back of drought-driven supply constraints.
Some price rises last month were the result of "external shocks over which we don't have much control", said deputy trade and industry minister Rob Davies. "We don't see any reason why the existence of these inflationary pressures should be undermining the move towards higher growth."
Mboweni has been raising concerns on the inflation threat posed by consumer credit growth. In March he said the actions of profligate consumers could threaten the inflation target. But in the past few months, statistics have shown a moderation in individual credit use.
The bank raised interest rates four times last year, lifting the repo rate by 2 percentage points to 9 percent. This was mainly to contain credit growth, mostly fuelled by consumption spending. Rates have been left unchanged this year.
Rising wage demands, including civil servants' demand for a 12 percent increase, will increase pressure on the Reserve Bank to take action.
"It's not going to do their credibility any good for them to sit back," said Khan.
But Kevin Lings, an economist at Stanlib, said the decision would be a close call. The bank had had two opportunities to hike rates in the face of a deteriorating inflation outlook, but had declined to do so.
Kelder said that while it was "too late" to do anything about the current inflation number, the monetary policy committee would have to manage expectations with the goal of getting CPIX inflation below 6 percent.
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