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Inflation Report Validates SARB’s Caution
Key Points
· The SARB’s cautious stance continues: It kept its key rate at 7% for the fourth straight month.
· The decision was not unanimous; some argue the recovery needs more monetary support.
· Demand-side inflation pressures remain weak, but consumer price inflation is hovering at the upper end of the target.
· Future monetary policy could hinge on whether higher electricity tariffs are approved.
The latest inflation data validate the South African Reserve Bank’s decision this week to keep its key policy interest rate unchanged at 7% for the fourth straight month. Whilst a rate cut would support South Africa’s recovery, it would add pressure to consumer price inflation, which continues to hover at the upper end of the SARB’s 3% to 6% target range. After three consecutive months of moderation, consumer price inflation rose to 6.3% y/y in December from 5.8% in November. Meanwhile, the headline producer price index for December rose on a year-ago basis for the first time in seven months.
High on the SARB’s watch list are surging electricity costs. The housing and utilities component of the CPI remains the largest contributor to consumer price inflation. Coming monetary policy decisions could hinge on the outcome of public utility Eskom’s request for a 35% increase in electricity tariffs. The SARB’s current inflation outlook assumes increases in electricity tariffs of 25% in 2010 and 2011. If Eskom’s request is granted—a decision is expected in February—electricity prices will rise more than first expected, and South Africa’s central bankers will be less inclined to entertain interest rate decreases.
The decision to keep the key repo rate on hold was not unanimous. Some Monetary Policy Committee members strongly advocated providing an additional monetary stimulus. Demand-side pressures on inflation remain weak amid rising unemployment, depressed household consumption, and credit contraction—symptoms of an ailing economy—supporting the argument that the overwhelming need is to nurture the economy back to health.
Considering that the recovery has just begun, the diversity of opinion amongst MPC members could increase in coming months. The governor has reiterated the SARB’s priority of achieving and maintaining low inflation. Yet, amid a public outcry for a more aggressive monetary stimulus, that mandate is being reviewed by a joint Treasury/SARB committee. Discussions will center on the effectiveness of inflation targeting and whether the SARB’s mandate should be expanded to include promotion of economic growth.
by Ruth Stroppiana and Mekael Teshome
This commentary is produced by Moody’s Economy.com, a division of Moody’s Analytics Inc., which is engaged in economic research and analysis. Moody’s Economy.com content is independent and does not reflect the opinions of Moody’s Investors Service Inc., the credit ratings agency. Both Moody’s Analytics and Moody’s Investors Service are subsidiaries of the Moody’s Corporation. If sourcing this article please quote Moody’s Economy.com.
