High inflation in South Africa
Thématique :
sud afrique
From The Economist Intelligence Unit, Apr 1st 2008
Interest rates are likely to rise again in South Africa
Tito Mboweni has warned that global conditions are set to become more difficult. With inflation continuing to rise, it is hard to see how the central bank governor can avoid another interest rate rise.
Claims by political and business leaders that South Africa's economic fundamentals are excellent are becoming more hollow.
Following yet another set of disappointing inflation data, Tito Mboweni, the governor of the South African Reserve Bank (SARB), warned consumers and businesses to "tighten their belts", although he stopped short of promising to tighten monetary policy and raise interest rates.
Many economists and analysts believe that he will have to act, however. George Glynos, market analyst with the ETM group, calls the 11.2% rise in producer prices in the year to February "a horrible number", adding that it will now be very difficult for the central bank to avoid yet another interest rate hike.
The SARB increased its key repo rate by 400 basis points between June 2006 and December 2007, but kept this key lending rate steady at 11% in January, warning that it was worried about restricting economic growth. Since then inflation has continued its relentless rise, with the central bank's targeted measure, CPIX, hitting 9.4% in February, its 11th month outside the official 3-6% target range.
Inflation will continue to rise
Since producer inflation is a leading indicator, meaning that a rise in the producer rate translates into increased retail level inflation a month or two later, all hopes of the rate peaking below 10% in the first quarter of 2008 have now been abandoned.
Inflation is being driven by four main forces: food prices, up 70% globally in the past year; oil prices (up 65%); the rand (down 15% against a very weak dollar so far this year); and strong domestic consumer demand at a time when output is constrained by bottlenecks, notably electricity and skilled manpower.
Going forward, the worry is that proposed electricity price hikes -of perhaps as much as 50-60% in 2008/09- will ensure that inflation stays in double figures, especially if food price inflation remains high, as seems probable, and the rand continues to slide.
The rand's weakness is something of a puzzle given record world market prices for South Africa's two largest exports -platinum and gold- and, until recently, abnormally high levels of capital inflows.
Part of the explanation is the global credit crunch. South Africa's economy is the most globalised in Africa, with a much higher degree of integration in global capital markets than any other on the continent. Accordingly, it is vulnerable to any emerging-market sell-off by OECD (and other) investors--indeed, more so than many of its emerging-market peers because of its large current-account deficit, currently running at 8% of GDP.
Although the banks' prime lending rates, of 14.5%, are the highest in eight years, they are still well below the peak of 25% in 1998. The consensus in the South African markets is that the SARB will nudge rates still higher at its April 9th meeting, although analysts are divided over whether the increase will be 0.25% or 0.5%. Although there was some cheer for the government when Statistics South Africa revealed that the unemployment rate fell fractionally to 23% in September 2007 -the lowest since records began in 2001- the country still has the highest unemployment rate in more than 60 countries for which comparable data are available.
The government's target is to cut the rate to 14% by 2014, but while 2.1m new jobs have been created since 2001, the pace of job generation is slowing as the economy loses momentum. With elections little more than a year away, the last thing ministers want to see is higher interest rates, which may be why Mr Mboweni is reluctant to come out in favour of such a move. He will have to make a decision soon, however, and if he does decide against a rise, a weaker rand and higher inflation are likely.
Interest rates are likely to rise again in South Africa
Tito Mboweni has warned that global conditions are set to become more difficult. With inflation continuing to rise, it is hard to see how the central bank governor can avoid another interest rate rise.
Claims by political and business leaders that South Africa's economic fundamentals are excellent are becoming more hollow.
Following yet another set of disappointing inflation data, Tito Mboweni, the governor of the South African Reserve Bank (SARB), warned consumers and businesses to "tighten their belts", although he stopped short of promising to tighten monetary policy and raise interest rates.
Many economists and analysts believe that he will have to act, however. George Glynos, market analyst with the ETM group, calls the 11.2% rise in producer prices in the year to February "a horrible number", adding that it will now be very difficult for the central bank to avoid yet another interest rate hike.
The SARB increased its key repo rate by 400 basis points between June 2006 and December 2007, but kept this key lending rate steady at 11% in January, warning that it was worried about restricting economic growth. Since then inflation has continued its relentless rise, with the central bank's targeted measure, CPIX, hitting 9.4% in February, its 11th month outside the official 3-6% target range.
Inflation will continue to rise
Since producer inflation is a leading indicator, meaning that a rise in the producer rate translates into increased retail level inflation a month or two later, all hopes of the rate peaking below 10% in the first quarter of 2008 have now been abandoned.
Inflation is being driven by four main forces: food prices, up 70% globally in the past year; oil prices (up 65%); the rand (down 15% against a very weak dollar so far this year); and strong domestic consumer demand at a time when output is constrained by bottlenecks, notably electricity and skilled manpower.
Going forward, the worry is that proposed electricity price hikes -of perhaps as much as 50-60% in 2008/09- will ensure that inflation stays in double figures, especially if food price inflation remains high, as seems probable, and the rand continues to slide.
The rand's weakness is something of a puzzle given record world market prices for South Africa's two largest exports -platinum and gold- and, until recently, abnormally high levels of capital inflows.
Part of the explanation is the global credit crunch. South Africa's economy is the most globalised in Africa, with a much higher degree of integration in global capital markets than any other on the continent. Accordingly, it is vulnerable to any emerging-market sell-off by OECD (and other) investors--indeed, more so than many of its emerging-market peers because of its large current-account deficit, currently running at 8% of GDP.
Although the banks' prime lending rates, of 14.5%, are the highest in eight years, they are still well below the peak of 25% in 1998. The consensus in the South African markets is that the SARB will nudge rates still higher at its April 9th meeting, although analysts are divided over whether the increase will be 0.25% or 0.5%. Although there was some cheer for the government when Statistics South Africa revealed that the unemployment rate fell fractionally to 23% in September 2007 -the lowest since records began in 2001- the country still has the highest unemployment rate in more than 60 countries for which comparable data are available.
The government's target is to cut the rate to 14% by 2014, but while 2.1m new jobs have been created since 2001, the pace of job generation is slowing as the economy loses momentum. With elections little more than a year away, the last thing ministers want to see is higher interest rates, which may be why Mr Mboweni is reluctant to come out in favour of such a move. He will have to make a decision soon, however, and if he does decide against a rise, a weaker rand and higher inflation are likely.
