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Busrep

May 19, 2004

By Quentin Wray

Johannesburg - If oil prices did not come down soon, South Africa's inflation targets would be put at risk and this had raised the spectre of higher interest rates, economists warned.

Annabel Bishop, an economist at Investec Bank, said the "biggest risk" to her inflation forecasts were rising petrol costs, which would continue to put upward pressure on consumer inflation in the months to come.

"Negative sentiment fuelled by tensions in the Middle East and geo-political uncertainty and modest inventory building have all contributed to drive the oil price," she said, adding that current price levels were "unsustainable and not supported by fundamentals".

She expected oil prices to moderate by the middle of the third quarter "at the latest", but that if this did not prove to be the case and oil prices continued to rise or even remained close to the $40 (R268) a barrel mark, then there was a risk of second round inflationary pressures that would see the prices of goods rising because of higher transport costs and "possibly becoming entrenched in the economy".

In terms of South Africa's inflation targeting regime, if CPIX inflation (which was 4.4 percent in March) looks set to rise above 6 percent, which is the upper end of its target band, the Reserve Bank will raise interest rates.

South African consumers last felt the effects of second round inflation when the rand crashed in late 2001.

Then, the Reserve Bank raised rates four times, pushing the prime lending rate from 13 percent to 17 percent, earning the ire of organised labour and business bodies, which claimed consumers were being punished for rising inflation when this had not been driven by demand.

According to Reuters, Reserve Bank governor Tito Mboweni told reporters in London that while oil prices were starting to spark inflation concerns, the markets should not expect an imminent rise in interest rates.

Nedcor economist Dennis Dykes said that rising interest rates were only one of high oil prices' negative effects: it would be bad for global growth - potentially leading to another global downturn if high prices continued for a long time - and this would reduce the ability of South African exporters to sell into overseas markets.