Inflation Warning by Reserve Bank Governor

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Reserve Bank Governor Tito Mboweni has warned that South Africa's strong growth rate could be one of the factors driving up the country's inflation rate, adding to the pressure from high oil prices, strong consumer spending and the recent poor performance of the agricultural sector.

However, the immediate heat following the bank governor's warning was somewhat dissipated on March 28 when Statistics South Africa released the February consumer inflation figures.

The consumer price index (CPI) showed year-on-year inflation running at 5.7%, a fall from the 6% of the previous month. The CPIX, the consumer inflation excluding mortgage costs, came in with an even better result, with an annualised rate of 4.9%, well down on the January figure of 5.3% and the 5.2% of the month before.

South Africa's core inflation rate, which excludes food products, interest rates on mortgages, personal loans, VAT and property taxes, rose 3.9% year-on-year in February, compared to the 4.1% for January.

The day before the inflation figures were released, Mboweni, in an address to the parliamentary portfolio committee on finance, suggested that one of the leading factors leading to the rise of the CPIX was the increasing cost of food, which contributed to 2.1% of the total.

While the better-than-expected results for February were welcome by both the government and the market, they will do little to allay inflation concerns raised by Mboweni.

In his presentation to the parliamentary committee on March 27, Mboweni painted a generally positive picture of the economy, saying growth was above the forecast levels.

"We are in fact growing at higher rates," he said. "We should tell the growth story and not present a picture as if we were not growing. It is growing quite robustly. It seems that we may be slightly above trend growth."

However, he also warned that there could be "inflationary consequences" if the rate of expansion continued at more than 5%.

A report by the Reserve Bank showed that there had been an increase in the annualised rate of gross domestic product (GDP) growth from 4.5% in the third quarter of 2006 to 5.5% in the last three months of the year.

According to Mboweni, this figure would have been in the vicinity of 6% but for lower than expected performances by the agriculture sector and what he described as sideways movement in the mining industry. He said the 13% drop in agricultural production in 2006 served to drive up food prices.

Mboweni's comments on growth and the agricultural sector were backed up by Brian Khan, the head of the Reserve Bank's research unit, who also addressed the committee.

"Were it not for the poor results from the farming sector, GDP would have grown by 6% in the last quarter of the previous year and, if price rises for food were not taken into consideration, the CPIX would have shown an inflation rate of about 4%, rather than 5.3%,"said Khan.

Another inflationary factor cited by Mboweni was consumer spending and high debt levels, which he described as being very significant, with household debt as a ratio of household disposable income running at 73.75%.

He also called on the government to speed up the implementation of its programme to cut down the cost of doing business in South Africa, saying structural changes would both support economic growth and ease inflationary concerns.

Another to echo the Reserve Bank governor's concerns was Colen Garrow, an economist with Brait South Africa. Though quoted as saying that the February figures were good, he cautioned that the results should not be hailed too soon.

"It's better than expected for sure," said Garrow. "It must take some pressure off the Reserve Bank to hike interest rates when it meets next month. The scenario we should probably be looking at is rates moving sideways for now. Looking ahead, we're probably looking at a sharp rise in food and fuel prices come the March figures, which will be released in April," he said.

Though both the government and the Reserve Bank are keen on curbing consumer debt and easing any threat of economic overheating, the February inflation results could relax pressures to apply further interest rate rises to squeeze credit. However, the underlying concerns set out by Mboweni remain and will need to be addressed.

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