In Need of Handling

Text size +-
Inflationary pressure is continuing to mount in South Africa, despite the best efforts of the reserve bank's Monetary Policy Committee (MPC) to rein it in.

Releasing its half-yearly review of monetary policy on November 6, the reserve bank said inflation remained a matter of concern. South Africa's consumer price index, which measures consumer inflation minus mortgage costs, has been running above the upper limit of 6% set by the bank since April, with September's inflation rate coming in at 6.7%.

Many of the causes for the continued high rate of inflation were external; resulting from what the bank called oil and food price shocks it said had posed a challenge to many central banks around the world. The report said a more generalised price-setting behaviour and monetary policy credibility were of significant concern.

The bank said a round of wage increases, which have averaged 7.2% for the first nine months of the year, needed to be offset by increased labour productivity in order not to build inflationary pressure.

However, the bank's report was not all bad news, saying there had been some signs that consumer spending, a major factor in pushing prices up, was moderating.

"The outlook for monetary policy will depend to a significant degree on whether these signs of moderation are sustained and sufficient to bring about the desired inflation outcome," the report said.

While there have been suggestions the MPC may raise rates again before the end of the year, with the committee due to meet again in early December, the bank's report acknowledged there was a time differential between enacting an increase and it having a direct effect on inflation.

"As inflation reacts with a lag to these changes, the task of the MPC is to assess whether the observed inflation response at a particular point in time is consistent with the desired return to within the target range in future," the bank's statement said.

That said, Tito Mboweni, the reserve bank's governor, had already flagged the possibility of a new rate rise, coming on top of the increase of 50 basis points on October 11, which took the bank's repo rate to 10.5%.

On October 30, Mboweni said, "It does not take a genius to realise we are in a tightening phase of monetary policy to dampen demand."

Mboweni also rejected criticism that past interest rate increases were restricting economic growth and costing jobs, saying the reserve was flexible but could not afford to be soft on inflation.

"The central bank are not inflation nutters," he said. "We do take into account what growth prospects are in the country and employment."

Among the "everyone" Mboweni said was looking to raise prices is electricity provider Eskom, which has applied for an 18% increase in tariffs for next year.

Brian Kahn, the reserve's senior deputy head of research, said if the sought-for rise in electricity prices became regular it could become a permanent part of the inflationary process.

"It is something that is going to put an upward bias on inflation," Kahn was quoted by a news agency as saying.

Eskom is pushing to pass on rising costs to consumers, costs in part fuelled by a global increase in the price of raw materials. If approved, the rise in electricity tariffs will have a direct flow on effect on the entire economy.

Concerns over inflation, and the possibility of further rate rises, were reflected in the results of the latest business confidence index, compiled by the South African Chamber of Commerce and Industry (SACCI).

Released on November 7, the index slipped to its lowest level in more than three and a half years, dipping to 96.9, from 98.7 in September.

Along with international developments, the SACCI said businesses were becoming concerned about the "local adjustment taking place".

The reserve has already said inflation will peak around January next year, before starting a slow downward movement later in the first quarter. Of course, this still depends on external pressures applied by international fuel prices and other global fluctuations. Good rains to alleviate drought conditions and ensure an improved harvest for the agriculture sector would also help. Unfortunately, while the MPC can tighten monetary supply and try to coax consumers to limit their spending, both outside factors and cloud bursts are out of the control of the reserve bank.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart

Read Next:

In South Africa

South Africa: Unsecured loans weigh on banking sector

Bankers have been quick to downplay weak results from one of South Africa’s largest providers of unsecured loans, saying the decline in profits at African Bank Investments Limited (ABIL) does not...


Exploring the future of sustainable aquaculture in emerging markets

With per capita fish consumption having doubled in the past six decades, aquaculture is becoming more important in combatting food insecurity. Recent innovations seek to improve sustainability and...