Mariam Isa
21 September 2007
Johannesburg — THE Reserve Bank said yesterday it will "fight" to drive inflation back inside its 3%- 6% target range and act decisively against broader price pressures in the economy, suggesting that interest rates may rise again this year.
Inflation has breached the upper end of the target range for four months in a row, despite a cumulative three percentage point hike in lending rates since June last year, which is starting to slow economic growth.
The Bank said it now expects its CPIX inflation gauge to be comfortably inside the target by the second half of next year, compared with the second quarter estimate unveiled in its monetary policy statement last month.
"The only thing you should not doubt is the resolve of the central bank to fight inflation back into the target range," the Bank's head of r esearch , Johan van den Heever, told reporters at the release of the Bank's annual report yesterday.
"That will be done, there is no doubt about that," he said.
Governor Tito Mboweni reinforced the hawkish message in a speech to the Bank's shareholders, saying that the breach of the target was a "setback" for monetary policy even though the main factors driving the trend - higher food and fuel prices - were beyond the reach of interest rates.
"We are mindful of the impact of these developments on inflation expectations and the need to act decisively against any emerging broader inflation pressures... and I emphasise here decisively," he said.
Mboweni said recent turmoil in global markets had made monetary policy more "challenging" for the Bank and further uncertainties lay ahead.
But he said the monetary policy committee had decided at its last meeting last month that it was "appropriate" to stay focused on the inflation target and react to financial market developments only as they affected the outlook - "and let me emphasise this going forward," he added.
The European Central Bank has halted a cycle of raising interest rates in response to a credit crunch sparked by problems in the risky US home loan market, while the US Federal Reserve reacted by cutting interest rates for the first time in four years.
Bank officials have said SA was "not immune" to the global crisis but that, so far, capital inflows have not subsided, while the rand has rallied against the weaker dollar - which will help keep price pressures at bay.
Higher wage settlements after a spate of strikes were likely to push consumer price inflation upwards unless productivity grew at a similar pace, the Bank's annual report said.
Local markets are betting the Bank will raise rates another half a percentage point next month, but the decision is seen as too close to call given a slowdown in consumer demand and economic growth.
"To me the overall emphasis of the annual report was highlighting inflation dangers... if there is any doubt about it coming down I don't think they will hesitate to hike rates again," said RMB economist Rudolf Gouws. "Our view is they probably will raise rates, but it's a touch and go decision and I think we are close to the top of the interest rate cycle."
Van den Heever said the annual increase in CPIX - which rose by a four-year high of 6,5% in July - had already neared the level which the Bank had expected to be its peak.
"As at the August committee meeting, the peak we saw was not far from where the current inflation rate stands.
"We are developing further scenarios and updates... it is never static," he said.
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