Kevin O’Grady

Economics Editor

THE risk posed to inflation by high international oil prices made it "inappropriate at this stage" to cut interest rates, despite the generally positive outlook for inflation, Reserve Bank governor Tito Mboweni said yesterday.

Announcing the decision of the Bank’s monetary policy committee to keep the repo rate at 7%, Mboweni warned that oil prices — which hit new records above $65 a barrel yesterday — could prove to be the inflation "party poopers".

"We are at the mercy of oil prices at this point. Surely, if oil prices continue to rise, that will have an impact on inflation, no doubt about it," Mboweni said.

Delivering an otherwise upbeat statement, he said that even with oil prices at their current levels, CPIX inflation was expected to remain within the Bank’s 3%-6% target range until the end of 2007.

"According to our central forecast, CPIX inflation (consumer inflation excluding mortgage costs) will begin to rise moderately and peak in the first quarter of 2006, marginally below 5,5%, whereafter it is expected to decline moderately."

CPIX has beaten market expectations on the downside for the past three months, with the latest reading, for June, coming in at an annual 3,5% compared with 3,9% the previous month.

Administered prices are still a worry because, despite declining significantly from the middle of 2003, they have remained static since the middle of 2004.

"In May and June, administered price inflation excluding petrol measured 7% and 6,9% respectively," Mboweni said.

There were also no immediate concerns about the performance of the economy, with indications that "the real economy has continued to grow at a robust pace".

The manufacturing sector seems to have recovered from the slowdown that prompted the Bank to cut rates 50 basis points in April. Domestic expenditure remains strong, as reflected in the rates of growth in money supply and private-sector borrowing.

Mboweni was also not overly concerned with recent high wage demands, saying the latest data showed average wage settlements of 6% in the first half of this year.

Economists welcomed the decision, saying the tone of the statement left the door open for a rate cut at the committee’s next meeting in October.

"The possibility of a rate cut in October is not excluded, although the oil price has to decline from current levels to around $50 a barrel before we would be comfortable with an interest rate cut," said Efficient Group economist Nico Kelder.

Nedbank chief economist Dennis Dykes said the decision to leave rates unchanged was "conservative", and the committee would "probably cut rates at the October meeting".

By then the rand is expected to have pulled back more against a weaker US dollar, and manufacturing and other production will have softened further, making a further 50-basis-point cut possible.

The rand gained 5c to R6,34 to the dollar shortly yesterday — its strongest level in three months.

Brait economist Colen Garrow said the decision showed that the committee was "committed to the inflation target, guarding it against the assault likely to arise from high international crude oil prices".