Double whammy for South Africans

2009-06-25 19:41
 Johannesburg - Cash-strapped South Africans received a double dose of bad news on Thursday - zero relief in interest rates and a massive hike in electricity prices.

The South African Reserve Bank's monetary policy committee (MPC) decided to leave its official rate unchanged at 7.5%. The decision surprised many economists and consumers, who were expecting a 50 basis-point rate cut.

"I think it would have made a difference to consumers," said Nedbank economist Nicky Weimar.

"It wouldn't have made them run out there and spend money, but it would have made it easier for them to service existing debt. Let's face it - debt in the current cycle is the highest it's ever been," she said.

Chief among the MPC's reasons for leaving interest rate unchanged was renewed inflation risks, primarily energy prices and other administered prices.

But Weimar said the Reserve Bank's estimations on the potential threats to inflation may be overdone.

"The focus should have been on cutting rates further," she said.

However, the 31.3% increase in tariffs which was awarded to state power utility Eskom by the National Energy Regulator on Wednesday clearly worried the authorities.

"It is certainly a problem. No doubt about it," said Reserve Bank governor Tito Mboweni on the tariff increase.

Rate-cut party over

"It is also possible to read in this an admission that with administered price increases contributing sizeably to the overall rise in consumer inflation, Sarb alone cannot hope to control inflation fully," said Standard Chartered Africa economist Razia Kahn.

"They can only react with the tools they have available to them. So electricity tariffs were increased. That would have to signal an end to the rate easing cycle for any inflation-targeting central bank. Point made," she said.

The electricity increase is marginally less than the 34% hike Eskom requested to help fund its expansion drive.

The new tariffs come into effect next week, at the beginning of July 2009.

Most economists agree that the interest rate cutting cycle is mostly over, although there are tentative forecasts for some relief later in 2009.

"The MPC is having second thoughts on fighting inflation and we can only hope that there might be a further cut in the second half," said Mike Schüssler, an economist at Economists.co.za.

Asked on the possibility of further cuts later this year, Mboweni was cryptic.

"I don't know," he said. "If I was the only member of the MPC, I wouldn't bet on it."

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