Bank holds rates firm on inflation fear
June 26, 2009
By Ethel Hazelhurst
The party is over - at least for the moment. At the last monetary policy meeting of his present term in office, Reserve Bank governor Tito Mboweni stuck to his controversial inflation-fighting stance.
He kept the bank's official repo rate unchanged at 7.5 percent yesterday, leaving benchmark prime and mortgage rates at 11 percent. And he served notice that the rate cutting cycle could be at an end.
Asked at a press briefing after the monetary policy committee (MPC) meeting if there could be rate cuts in the future, he said: "I don't know. But if I were the only member of the MPC, I would say: 'Don't expect it!'"
If Mboweni is not reappointed when his term ends in August, his successor may take a different approach, in view of the low levels of economic growth. The economy shrank at a 6.4 percent pace in the first quarter, after a contraction of nearly 2 percent in the previous quarter. Mboweni said that, based on recent data, the "negative trend is likely to have continued in the second quarter".
The decision to hold the rate steady came as a surprise. Of 23 economists surveyed by Bloomberg, 21 had predicted a half-percentage point cut.
But Econometrix chief economist Azar Jammine said the decision "enhanced the credibility of the Reserve Bank". In light of Eskom's tariff increase of more than 31 percent and rising inflation expectations, the bank could have made no other decision.
Citi economist Jean Francois Mercier and Brait economist Colen Garrow agreed.
"There is good reason for this cautious approach," said Garrow.
Mboweni stressed the bank's responsibility to keep inflation at low levels, saying: "Inflation is bad for the working classes and the poor."
The comment was clearly aimed at trade union federation Cosatu, which has waged a war against the bank for sticking to its mandate of preserving price stability. Cosatu has argued for substantially bigger interest rate cuts and has called for inflation targeting to be scrapped.
However, people with low incomes and little debt are most vulnerable to rising prices - particularly if they are unemployed and therefore unable to protect themselves by demanding higher wages.
In response to a question on whether the bank's 3 percent to 6 percent inflation target range could be raised, Mboweni pointed out that the range was not set by the central bank but by the government. But the bank's credibility depended on keeping inflation at low levels.
The repo rate, which has been cut from 12 percent in December, is negative in real terms - in other words, it is lower than the 8 percent inflation rate recorded in May. And borrowers' interest rate commitments have already been cut by 44 percent. This is reflected in falls in monthly mortgage repayments - which include repayment of capital. On a 20-year loan of R800 000 at prime, the monthly repayment has fallen by R2 573 to R8 258.
Mboweni once again raised questions of "structural rigidity in the economy".
He said administered prices were part of the problem - particularly electricity prices. But prices in the private sector were also responsible for "sticky" consumer inflation.
His concerns were reflected in the official MPC statement: "Food price inflation declined from 13.6 percent in April to 12.1 percent in May, but remains the main contributor to the inflation outcome, having contributed 1.9 percentage points."
Concerns have been raised because consumer inflation is decelerating slowly while prices at the producer level are already in reverse. Statistics SA reported yesterday that producer prices - as goods leave farms and factories - fell 3 percent year on year in May.
Mboweni said the bank expected inflation to fall within the target range in the second quarter of next year.
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