Currency losses may be hiding other inflationary factors, say analysts, such as increasing food prices
THE rand's puzzling loss of value may be putting upward pressure on prices and interest rates, but there are other inflationary pressures that the currency's losses conspire to hide.
UBS Warburg economist Michael McClintock said there were already rumours in the market that interest rates were going to be raised and he said bonds might already be pricing in a hike of rates.
The rand has lost 15%-20% of its value since September and depreciated at a rapid pace inbetween key psychological levels like R9 and R10 to the dollar. The rand broke through the R10 to the dollar level on November 22 and broke through the R11 to the dollar level yesterday, prompting some economists to say that the 3%-6% inflation target for 2002 is in jeopardy.
Brait chief economist Colen Garrow said markets were now speculating whether it was up to government to stabilise the rand, with exchange control restrictions being seen as an option in some quarters. Garrow said attention was being focused on government and the National Treasury for methods to stop the rand's slide and assure investors their money would not lose further value, because the Reserve Bank cannot allow the rand to undermine next year's inflation target.
In characteristically baffling fashion the rand slid when there was market speculation that exchange controls would be scrapped in next year's budget.
Garrow said that if the Reserve Bank was thinking of cutting rates, a 25 basis point cut may not be enough to steady the currency. McClintock says the Bank should hold off on raising rates for as long as possible, because markets are growth-driven and would react negatively to a growth-limiting raising of rates.
Even if rates are not raised, many economists now see the lowering of rates that many of them had predicted in the first quarter of next year as an impossibility.
Changes in rates will take effect only in 2003, meaning that the Bank cannot influence the inflation picture for next year by adjusting rates.
McClintock said the inflation target for 2003 should still be within reach if the rand found a level where it could stabilise.
The danger is now for 2004, when the top end of the inflation target has been lowered to 5% and McClintock said that action taken to affect the 2004 target may be taken in the second half of next year.
McClintock is not overly pessimistic about the rand's effect on inflation, however, and he says a lot of the pressure that the rand has exerted on prices will be offset by lower oil prices.
Petrol prices dropped by 25c/l last night, a move that he described as extraordinary.
But he echoes the concern that the Reserve Bank raised in its quarterly bulletin on Tuesday, saying food prices are cause for concern.
Food makes up 18% of the basket of the headline consumer price index and 22% of the targeted measure of inflation, CPIX, making it a major source of pressure.
He said food prices were a bigger concern than the rand and he had been concerned about these prices since the beginning of the year.
Food prices historically experience an uptick before Christmas and McClintock says that food prices may also be working the effects of last year's flooding out of the system.
The housing and medical components of inflation are still in double-digit territory and McClintock says without these two areas being brought under control, inflation of 5% will be difficult to achieve.