Inflation target should now be reviewed: Investec
November 25, 2009
South Africa has missed its inflation target for more months than it has achieved it, indicating that a too narrow band was initially imposed for a country that has a history of double-digit inflation and making the need for a wider band necessary, says chief economist from Investec, Annabel Bishop.
She says drastic Eskom increases are only going to serve to keep inflation higher than it would normally be.
She noted on Wednesday that the targeted measure of inflation, whether CPIX or CPI, has averaged 6.8 percent year-on-year (y/y), well above the 6.0 percent upper limit of the target band.
"While it is not optimal to change the inflation target range when inflation is above the target, and has been for well over two years, the narrowness of SA's target range and high level of misses does warrant some review," she says.
Inflation is now back within target at 5.9 percent anyway, according to data released this morning.
"In the absence of changing the target measure to CPI excluding energy costs from plain CPI, or following a dual target (growth/employment and low inflation), we maintain the inflation targeting band should be temporarily (and only temporarily) widened to 2.0 percent to 2.5 percent around the midpoint, instead of the current 1.5 percent, with the midpoint itself at 5.0 percent or even 5.5 percent," says Bishop.
She also makes the point that Eskom tariff hikes of above 30 percent, and as high as 45 percent a year are a reality, as long as the utility avoids borrowing the full amount it needs for its capital expenditure programme.
"The direct and indirect impact of these increases in electricity costs will keep inflation mainly out of the target, unless countered by the fortuitous occurrence of an ongoing significant decline in the rand oil price or other imported deflationary pressure, which is unlikely." - I-Net Bridge
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