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Eskom decision threatens rates
13/05/2008 17:49 - (SA)
Evan Pickworth
Pretoria - It appears that interest rate policy going forward will be beholden to the severity of exogenous issues, with the
electricity price decision due on June 6 probably the biggest threat right now.
Eskom is asking for 60% instead of 14.2% price increases and the concern is that as broader inflationary impacts are already being read, and with inflation at over 10%, an increase in prices of 60% will be a bridge too far.
The Reserve Bank's famous fan chart, which is an inflation-forecasting model highly regarded over the years, only takes account for an increase of 14.2% and the 2c/kW electricity levy.
According to this, CPIX is expected to peak at 9.3% in the first quarter - bad enough.
Now once any more is added the picture, it is immediately clouded and the risk increases proportionately for more rate hikes.
This risk is one thing that is an additionally nasty one for SA policymakers over and above their fellow inflation-targeting brethren, thus causing consternation among investors, reflected in a soft rand via risk aversion.
The latest Monetary Policy Review, released today, notes that increased risk aversion by foreign investors has "significantly lowered" foreign portfolio inflows to R2.9bn in the fourth quarter of 2007 from an inflow of 33.7 billion in the third quarter.
The bank appeared to be cautiously hawkish on Tuesday, as it did acknowledge that the economy has been responding to the combined 450 basis points in interest rate increases since June 2006.
But it now boils down to the broader shocks that go beyond the first round, and it is further impact effect here that will cause the bank to take action if they push inflation expectations out of kilter any more.
As the bank explains in the MPR it needs to react to second-round or generalised effects when they come through. There is not much it can do at the first point of contact.
It thus appropriately concerned that the inflation expectations anchor has been lost in the stormy seas affronting the economic coast.
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