Guiding consumers since 2009

Inflation ‘to bust target till 2010' on Eskom hikes

By Staff Writer

By Mariam Isa, Economics Editor, Business Day

If Eskom gets its way and electricity prices double over the next two years, inflation could breach its previous record of 11,3% in the next few months, and stay outside its 3%-6% target range until late in 2010.

That would put SA's inflation targeting framework into an untenable position, which might persuade the Reserve Bank to invoke an "explanation clause" to avoid raising interest rates when it is unwarranted.

In documents made public this week, Eskom asked the National Energy Regulator of SA (Nersa) for authorisation to raise its tariffs by a cumulative 100% over the next two years to cover soaring costs and its R343bn expansion programme.

If those increases are approved - starting with a proposed 60% tariff hike this year - the annual rise in the CPIX inflation gauge will jump to at least 11% in July or August.

That would be well above an expected 10% rise this month - which was the inflation peak predicted by analysts before the extent of Eskom's planned electricity tariff hikes were known.

"If you get a full percentage point increase in electricity tariffs spread over two years, that would add 1,8 percentage points to CPIX each year and generate a second inflation peak of about 11% in July," said Absa Capital research head Jeff Gable.

"If we were to assume a hike of 50% this year and 50% next year, we won't come back into the target range until the second half of 2010. This is an environment where it might make sense for the Reserve Bank to use its explanation clause," he said.

Gable was referring to a modification to the inflation targeting framework introduced in November 2003. It stipulates that if exogenous shocks beyond the control of monetary policy force inflation out of its target range, the Bank should inform the public about the situation and say how it will respond.

Previously, the clause was known as an "escape clause", but the Bank says that created problems in communicating its monetary policy decisions. In a paper published in July 2004, the Bank says it "recognises that decisions which ignore special circumstances could lead to instability in the real economy".

"If a severe shock affects the economy, extreme measures to reach the inflation target could be very costly in terms of lost output and employment."

Several analysts believe the time is right for the Bank to use the explanation clause, though it would still be responsible for bringing inflation back to its target range over time.

Soaring global costs for food and fuel have been the main culprits so far in propelling inflation out of its 3%-6% target range for 11 months in a row, boosting the annual rise to 9,4% in February.

That was a near five-year peak. Some analysts believe the new electricity price hikes could even boost CPIX beyond its previous record peak of 11,3% scaled in October and November 2002.

"Our updated inflation scenario would see CPIX not returning to target until the third quarter of 2010, peaking in August this year at 11,6%, and ending 2008 at 9,9%," said Lehman Brothers analyst Peter Attard Montalto.

Nersa will announce its decision on Eskom's requests in early June, which means any change in this year's existing price hike of 14,2% will likely be implemented in July.

That is also the month when Statistics SA carries out its winter survey of electricity prices, so they should feed into consumer prices then.

But it is still too early to factor the new increases into inflation forecasts, and they are also likely to be excluded from the Bank's predictions when it announces its decision on interest rates today.

Governor Tito Mboweni has already slammed Eskom's earlier price hike requests as irresponsible, saying there were less damaging ways for the utility to get its money.

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