From Business Day
by Mariam Isa
There is still a real risk of interest rate hikes later this year, with the
performance of the volatile rand likely to play a key role, along with the
effect of soaring electricity prices.
Governor Tito Mboweni emphasised that the Bank's seven-member monetary policy committee (MPC) considered it apt "at this time" to keep its key repo rate steady at 11%, after raising it eight times since June 2006.
He also said there were still "upside risks" to the inflation outlook,
including the main culprits so far - soaring food and fuel prices, which are
part of a global trend.
"The MPC remains committed to bringing inflation back to within the target
range," he said.
Given that the annual increase in CPIX leapt to 8,6% in December from 7,9% in November - further away from the upper limit of its 3%-to-6% target - the
decision was seen as somewhat controversial, even if widely applauded.
"We believe the MPC took the right decision today," said Efficient Research
economist Fanie Joubert. "Consumers are trapped by numerous uncertainties.
This move should provide some stability and give them time to absorb some of the recent shocks."
Chronic power shortages and a government decision this week to cut electricity
consumption 10% until 2010 will significantly curb growth in all sectors of SA's economy, which is already slowing in response to higher interest rates and
jittery global markets.
"It should be kept in mind the primary mandate of the Bank remains price
stability and if international worries get sorted out and our lights are turned
back on, the MPC could quickly become more hawkish," Joubert said.
Many other analysts agree. Mboweni took pains to point out the bad news in a
televised press conference: there was no chance inflation would return to its
target range in the first quarter this year, rising to a likelihood of just 1%
in the second quarter, 10% in the third quarter and 65% in the final quarter.
All things being equal, next year CPIX is expected to hover at 5,6% - too close to the upper end of the target for comfort.
"It looks to me that there are still upside risks to the projection ... it will be
difficult for the market to get excited about pricing in interest rate cuts,"
said Absa Capital chief economist Jeff Gable.
"We may see continued nervousness about whether there might be another hike. If there is a move in policy in the next three MPC meetings it's going to be a hike - if it's in the following three meetings it may be a rate cut." The Bank's MPC holds its next scheduled meeting in April.
Mboweni said the Bank's latest inflation forecasts, which predict CPIX will average 8,5% in the first quarter of this year, up from 7,8% in its estimates last month, took into account a slide in the rand, which had depreciated by 7% on a trade-weighted basis so far this year.
The unit fell 2% against the greenback after the Bank's decision was announced, briefly hitting a new five-month low at 7,55 to the dollar. This is worrying as a weaker domestic currency makes the price of imports more expensive, and worsens price pressures generated by oil prices, which have retreated so far this year after caling record peaks at $100 a barrel last month.
"As the slowdown in growth manifests itself more clearly, markets are likely to
accept the need for interest rates to stay on hold," said Razia Khan, Standard
Chartered's regional research head for Africa. "But near-term, watch that rand.
There are more worrying inflation releases ahead, and sentiment will be vulnerable."
One of the main reasons the rand has taken a knock is renewed risk aversion in global markets, which means that investors shy away from emerging economies generally.
Yet, as one Bank official pointed out ahead of the MPC announcement, the rand's under-performance versus its peers in the past few weeks suggests domestic issues also figure.
These could include the effect of power shortages, set to last for another five
years, along with uncertainty over economic policy continuity, after a swing to
the left in elections for the ruling African National Congress in December.
Mboweni neatly sidestepped questions on whether SA's inflation targeting framework would remain in place, given that prominent members of the new ANC leadership have said it is time to "revisit" the policy.
"As far as I am concerned the mandate of the Bank stays the same," he told
reporters. "We take our mandate from the government, not the Democratic Alliance and not from someone speaking from some corner somewhere." Barring unforeseen events, Mboweni will remain at the Bank's helm until his second five-year term ends in August next year.
Global risk aversion and possible concerns about the direction of SA's economic policy have also made their mark on the portfolio inflows that have so far financed the country's ballooning deficit on the current account, its broadest measure of trade.
Mboweni acknowledged the net balance on foreign purchases and sales of South African bonds and equities had slid into the red so far this year, with net sales amounting to R11bn. At the end of January last year, the balance was positive, with net inflows for the whole year adding up to more than R80bn.
If the trend carries on, the rand will weaken further. Most analysts are now
predicting CPIX will peak at above 9% next month, while the current account deficit will widen to more than 7% of gross domestic product - which will make capital inflows even more necessary.
Mboweni put a positive spin on the figures, saying the capital may have been
reallocated to different assets in SA - which could mean money markets. To support that conclusion, he noted the Bank was able to continue buying foreign exchange to build its reserves in the final months of last year, when foreign portfolio investments into SA had already begun to subside.
Electricity prices are another big inflation threat, with the national regulator
agreeing to a 14,2% increase in tariffs for power utility Eskom this year, to help fund its delayed expansion.