Oil, food prices bode ill for inflation target

2011-02-12 12:05

Local economists have warned that Reserve Bank governor Gill Marcus could be forced to hike ­interest rates early next year if ­inflation spiralled out of the 3% to 6% target range as a result of rising food and oil prices.

Nedbank economist Isaac ­Matshego said the inflation target could be breached by the end of the year, leaving Marcus with no option but to increase interest rates in the first quarter of next year.

“Rising interest rates are negative for economic growth, but we need to understand that sometimes the Reserve Bank has to act against inflation to ensure macro-economic stability in the medium to long term,” Matshego said.

Investec economist Annabel Bishop said rising food prices and a weaker rand could potentially lead to the inflation target being missed, but she ­expected inflation to average 5.5% by the end of the year.

“The risk to this view (5.5% forecast) is that SA’s food production levels could fail to meet ­demand, potentially due to ­widespread flood damage and other detrimental weather conditions necessitating imports.

“In this case, the high global food inflation rate would then be imported into SA, potentially pushing inflation above the 6% target,” warned Bishop.

According to figures released by Statistics South Africa last month, consumer inflation slowed to 3.5% year on year in ­December from 3.6% in ­November.

The comments by Bishop and Matshego come after Marcus ­expressed concerns in a speech posted on the Reserve Bank’s website about the risk posed by surging oil and food prices to the inflation target.

The petrol price has already ­increased by 11.4% since last September due to increasing crude oil prices.

“While inflation appears to be under control, there are increasing risks to the outlook posed by rising global commodity prices, particularly food and oil prices.

“Should food and oil prices ­impact on domestic inflation by more than is currently expected, we may see inflation moving ­towards the upper end of the ­target range sooner than ­expected,” Marcus said.

In the speech, she made it clear that there will be no further interest rate cuts for some time, indicating an end to a cycle of interest rate slashing, which began in June 2008. Since then, the interest rate has been cut by 650 basis points.

“Household consumption expenditure is exhibiting signs of a sustained recovery and bank credit extension, while still relatively subdued, is also improving.

“Consequently, additional stimulus is not called for at this stage,” said the central bank’s governor.

Despite the threat posed by high food and oil prices, Marcus said it would not be wise to hike interest rates in the middle of an economic recovery.

“Under such circumstances, raising interest rates will not only exacerbate the fragility of the ­recovery but may not do much to alleviate the first-round effects of these shocks,” she said.

She also expressed concerns about the impact the political ­uncertainty in North Africa and the Middle East might have on the South African economy.

“We live in uncertain and rapidly changing times, as evidenced by recent developments in North Africa and the Middle East.

“The prevailing political uncertainty will no doubt impact on the global economic outlook, as can be seen by the oil price breaching the $100 per barrel level,” said Marcus.

Thousands of anti-government protesters in Egypt have for the past two weeks taken to the streets to try to end President Hosni Mubarak’s 30-year rule.

But Mubarak has been defying calls for him to immediately step down, saying he will hand over power when his term ends in ­September.

Mubarak’s rule came under threat when ­another North African strongman, Tunisian President Zine el-Abidine Ben Ali, fell from power in January following angry ­demonstrations against his rule.

While North Africa is the ­epicentre of the political turmoil, the protests have spread to the Middle East, the world’s major oil supplying region.

Yemen and Jordan have experienced angry demonstrations with the latter’s ruler, King­ ­Abdullah II, announcing a regime change.

There are fears that more North African and Middle Eastern ­nations could face similar protests, an outcome that may affect oil supply to world markets.

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