Inflation slips further from target

Posted On Wednesday, 20 March 2002 03:01 Published by
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February data from Stats SA fuels speculation that central bank might increase repo rate again in June
February data from Stats SA fuels speculation that central bank might increase repo rate again in June

INFLATION moved further away from the Reserve Bank's official target last month, fuelling speculation that another interest-rate hike is on the cards for June.

Statistics SA figures released yesterday showed CPI-X, consumer inflation excluding mortgages, increased to 7,5%, compared with 7,1% in January.

This is a fourth consecutive month that CPI-X has fallen outside the Bank's targeted range of 3%-6%.

Meanwhile, Bank governor Tito Mboweni defended recent repo rate hikes, saying they would contribute to dampening domestic demand and so hold back rising inflation.

Inflation and inflationary expectations were on the rise, and had to be nipped in the bud, Mboweni told Parliament's finance committee at a briefing on the Bank's latest bulletin. He expressed confidence that the Bank would succeed in dampening expectations.

'The figures are now showing CPIX is under pressure, and we have to do something about it.... it is very important we break this psychological thinking that Mboweni's role is to reduce interest rates. It's nonsense,' he said. Regardless of whether demand or cost push factors were at play in stimulating inflation, the bottom line was that the Bank had to act.

According to Statistics SA data, the rate of change in the consumer price index rose to 6,1% last month, from 5% in January.

Core inflation, which gauges headline inflation less some volatile food prices, indirect taxes and interest rates, moved from 6,4% to 6,9% during the same period.

The rise in CPI-X for February was below market expectations of 7,7%, but economists still believe the weak currency would continue to push inflation upwards this year.

Standard Bank estimated that CPI-X would average 7,8% by yearend and 6,1% for 2003, while JP Morgan put the figures at 7,4% for this year and 5,7% for next year.

PSG Investment Bank group economist Noelani King Conradie said the longer-term outlook for inflation namely, beyond the next 18 months was still positive.

'This means that we do not believe that the SA economy will be returning to the era of double-digit inflation over a long period of time,' she said.

A positive feature of the data was the fact that the annual rate of increase in food prices was down to 11,7% last month, from 12,3% in January. The 11,7% increase in February was mainly because of annual increases in the prices of meat, grain products, vegetables, milk, cheese and eggs.

JP Morgan economist Taryn Rebeck said though there were upside risks for inflation, further interest rate increases were not the answer as current inflation was 'cost push rather than demand pull'.

'There are risks on the upside to the 2002 and 2003 forecasts if corporates take advantage of rand weakness to push through across the board price increases to recoup some of the margin erosion of the past 10 years,' said Rebeck.

January's high 11, 5% producer price index could not be underplayed as these price hikes could feed through into upcoming CPI inflation releases.

Standard Bank economist Monica Ambrosi said the latest inflation numbers vindicated the Bank's rate increase last week.

'Bearing in mind that this monetary tightening is aimed at influencing the 2003 target only, the odds are tilted in favour of a further 50 basis points interest rate hike in June,' she said.

King Conradie said orthodox theory taught the raising of interest rates in a move to protect domestic price stability, but recent experience in the euro zone and Brazil suggested these increases not only hit growth expectations but, by discouraging investment, 'lock in' further currency weakness.


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