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South Africa: Mboweni Warns of More Rate Hikes As CPIX Soars
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Business Day (Johannesburg)
27 March 2008
Posted to the web 27 March 2008
Linda Ensor And Mariam Isa
Johannesburg
RESERVE Bank Governor Tito Mboweni warned yesterday that soaring price pressures had spread beyond food and fuel, as official data showed SA's main inflation rate surged to 9,4% last month, a five-year peak.
Markets moved to price in rising speculation that the Bank would hike interest rates at its policy meeting next month to fight the trend -- but Mboweni was adamant that "I did not mean that".
"If you look at the global and domestic situation, things are going to get more difficult before they get better, so we should just tighten our belts. I was not suggesting rates are going to go up," he told Parliament's finance committee.
Inflation has breached its 3%-6% target range for 11 months running and is expected to peak near 10% next month, as the rand's sharp depreciation and looming hikes in electricity tariffs feed into prices.
The Bank has raised interest rates by four percentage points since June 2006 in a bid to stem inflation, but so far the effect has been seen in waning consumer demand -- the main engine of economic growth.
This is worrying at a time when the global economy is slowing and an electricity crisis is also curbing growth.
Mboweni said the Bank would take "whatever action was needed to anchor inflation expectations at the low side" and there was no danger of "overdosing" the economy with higher interest rates.
"If there is an overdose of any medicine, there is a danger of killing the patient. I don't think we are in that situation now. We have seen much higher interest rates," he said.
Prime lending rates set by commercial banks stand at 14,5% -- their highest in eight years -- but are well below a peak of more than 25% in 1998.
At its latest policy meeting in January, the Bank kept interest rates steady, giving more weight to the threat to growth than the deteriorating inflation outlook, which stems mainly from rising global oil and food prices.
Many analysts believe this will remain the case when the Bank's monetary policy committee (MPC) meets on April 9-10, but local money markets are now pricing in an 80%-90% chance of another rate hike.
"It seems clear that the MPC is now more concerned about inflation than growth and will pick up where it left off in December," said Lehman Brothers analyst Peter Attard Montalto.
Headline consumer inflation rose by an annual rate of 9,8% versus 9,3% in January, while the annual rise in the official CPIX gauge -- which excludes home loans -- quickened to 9,4% from 8,8% in January, Statistics SA said.
The core measure of inflation, which excludes some fresh food prices, leapt to 8,9% from 8,1% in January.
Much of the impetus came from petrol prices, which rose 2,3% last month, pushing transport costs up. A steeper rise is likely this month, as petrol climbed another 8% -- tracking record oil prices -- and the rand extended its losses this year to 20% against a trade-weighted basket of currencies. A weaker rand stokes inflation by making imports more expensive.
Mboweni said last week the rand's depreciation would keep inflation outside its target range for longer than expected.
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He has also said that possible second-round effects of inflation could force a tightening of monetary policy. "Taking out food and energy prices, we still see the trend is on the upside, meaning we are experiencing some second-round effects," he said yesterday.
Mboweni said oil was unlikely to fall soon. He highlighted the inflation risk posed by electricity prices, which will rise 14,2% next month. Eskom wants to hike prices 60% to help cover the soaring cost of coal and its expansion programme. This could push inflation up another two percentage points.
The Inkatha Freedom Party added its voice yesterday to calls for the government to "urgently" adjust the inflation target range upwards, to avoid further rate hikes. But Mboweni said he would advise against the step as it might alarm investors.
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