Inflation won't be tamed any time soon - Moody's
October 25, 2007
By Tonny Mafu
Johannesburg - Moody's, the international ratings agency, yesterday poured cold water on hopes that inflation would soon be tamed.
It said household spending could have more steam than initially expected, raising the possibility that inflation may remain outside the Reserve Bank's target band of between 3 percent and 6 percent for longer than previously thought.
CPIX (consumer price index less mortgage rates) breached the central bank's limit in April after a 44-month spell within the range. Despite interest rate increases of 350 basis points since June last year, inflation has remained above 6 percent.
In its review of the economy, issued yesterday, Moody's cited domestic spending as one of its concerns in its forecast.
"The economy has been showing signs of overheating given the continued rapid pace of credit creation and lately, a pick-up in inflation beyond the upper limit of the Reserve Bank's 3 percent to 6 percent target band. Household spending may have more momentum than anticipated, aggravating symptoms of overheating, such as the current account deficit and inflation," the agency said.
Retail sales have remained buoyant, growing by 6.9 percent in August, compared with 6.4 percent the previous month.
Nedbank's economic research unit attributed the growth to strong sales of non-durable and semidurable goods.
A study by the Bureau of Economic Research (BER) ascribed the buoyancy in retail sales to strong consumer optimism, which includes confidence over their personal finances. The First National Bank/BER consumer confidence index for the third quarter fell only marginally from a record high of 23 in the first quarter and 21 in the second.
However, economists said there are signs of a slowdown.
Johan Botha, an economist at Standard Bank, said the August retail numbers were the second lowest for the year. He attributed this to rising interest rates.
"It appears that the monetary policy tightening that took place in the latter half of 2006 and from June onwards is having the desired effect with growth in retail sales showing a declining trend over the last eight months," Botha said.
Nedbank said spending on durable goods had slowed, falling to their lowest levels since February last year.
The bank expected growth in sales to be sluggish for the remainder of the year, with higher interest rates and stringent credit conditions keeping consumers at bay.
Inflation, page 8
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