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S.Africa’s cenbank changes tone on inflation

By on March 16, 2012

Inflation pressures in South Africa are now likely becoming more generalized, reflecting demand-side pressure rather than only external factors, the central bank warned, seeming to signal an eventual monetary tightening.

“In general, monetary policy can do little to combat the impact or first round effects of inflation that is driven by exogenous shocks,” South African Reserve Bank Governor (SARB) Gill Marcus said in a statement on the bank’s website on Thursday.

“However, the most recent data seem to suggest that inflation is becoming more generalized, and may reflect the emergence of demand pressures. This is something that the Bank will monitor very carefully,” he said.

The central bank has kept interest rates unchanged at 30-year lows of 5.5 percent, after a cumulative 650-basis-point reduction in the two years to November 2010.

“Alarm bells went off in my head because this is the first time ever since the crisis that we’ve had the SARB saying this sort of thing,” said Razia Khan, head of Africa Research at Standard Chartered.

The bank has consistently said inflation pressures were of a cost-push nature and it would not be appropriate to raise interest rates given the lack of demand-side pressures.

“I am seeing this as significant because the language is meaningfully different to what came before. That could be construed as the SARB potentially preparing the way for a tightening,” Khan added.

Speaking at a business dinner in Johannesburg, Marcus said high inflation was hurting the poor who are unable to hedge themselves against price increases.

Inflation for the very low expenditure group, which spends a large part of their income of food and transport costs, was at 8.1 percent compared to 5.7 percent for the very high expenditure group.


Marcus also said the inflation rate should come back to within the 3-6 percent target set by the central bank by the end of the year.

“Recent developments, including the below inflation tariff increase granted to the ports, the reduction in the proposed e-toll tariffs and the reduction in the electricity tariff increase granted to Eskom are encouraging,” Marcus said.

South Africa’s energy regulator announced on Friday it had cut to 16 percent an electricity rates increase for power utility Eskom, from a previously approved 25.9 percent.

The governor warned, however, that there were a lot of uncertainties, such as upside risks from international oil prices.

Inflation stood at 6.3 percent in January and the bank has previously forecast it would stay above the target range until the first quarter of 2013.

But analysts said this was only a slight moderation to the central bank’s forecast and not as meaningful as its warning about demand pressure on inflation.

The market is likely to keep a keen focus on the demand side in inflation data due next week.


Marcus said accommodative monetary policy was limited in its ability to help growth and South Africa needed investment to boost its growth potential.

Economic growth in Africa’s largest economy has largely been driven by consumer spending, “which is clearly an undesirable and unsustainable growth path,” the central banker said.

The Finance Ministry unveiled in its budget some 845 billion rand in infrastructure spending over the medium term, which could give momentum to the country’s sluggish growth recovery since a 2009 recession.

The bank acknowledged a cloudy regulatory environment in the mining sector which may be the hindrance to private sector investment, along with lacking rail infrastructure needed to transport output.

South African President Jacob Zuma last month promised to keep the sector “globally competitive,” seeming to knock down prospects of nationalizing mines regularly pushed by some groups in his ruling African National Congress party.

He pledged a 300 billion rand, 7-year investment for state rail and ports firm Transnet, which has in the past experienced logistical bottlenecks.

Marcus also said the central bank recognized that its price stability mandate must be undertaken with a recognition of the possible impacts on employment and growth.

Nearly a quarter of South Africa’s labor force is without work and the government has said the economy needs to grow at around 7 percent to make a meaningful dent in the jobless rate.

Growth in the last quarter of 2011 quickened to 3.2 percent driven by consumer demand, and preliminary estimates put GDP growth at 3.1 percent in 2011 from 2.9 percent in 2010.

But growth is expected to slow in 2012 with recent soft data signaling lower GDP for the first quarter.

The Finance Ministry has cut its growth forecast for the year to 2.7 percent from a previous projection of 3.4 percent, mainly reflecting the impact of a slowdown in Europe, a key trading partner that absorbs about 30 percent of South Africa’s exports.


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