Tito's worst nightmare almost a reality

The Numbers

CPIX: February 2008: 9.4% (yoy)

CPIX: February 2008: 0.4% (mom)

CPI February 2008: 9.8% (yoy)

CPI February 2008: 0.3% (mom)

TITO’S WORST NIGHTMARE ALMOST A REALITY

If Mr. Tito Mboweni, president of the South African Reserve Bank, is to be taken on his word, another increase in interest rates in April seems almost inevitable. The reason being his statement last week that if second round effects is seen to be pushing the CPIX higher, an increase in interest rates will have to be considered seriously. And the release of February’s inflation numbers show that this is indeed happening.

Interest rate sensitive prices (CPIX minus food- and administered prices), which depicts second round inflation in the clearest possible way, increased by 5.7% in February, exactly the same as in January. Though this number did not increase, which is encouraging, it also did not decrease. And as petrol prices for March will show a year on year increase of 37.7% to push non-interest inflation even higher than the current 13.3%, it will most certainly have an impact on interest rate sensitive prices.

In addition, the proposed electricity tariff increases, will also add its weight to increase the fuel and power category from its current increase of 9% to way above 10%. These changes might see March’s CPIX to increase by around 10%.

However, even though Mboweni & co. might be keen to raise interest rates again to stem second round effects and salary increases, it might be the wrong policy decision. Especially as the major proportion of inflation is caused by factors over which interest rates have little if any control.

The demand side of the economy is already cooling at a fast rate. Retail sales grew by 0.2% in January; car sales are still in a shrinking trend, whilst consumption expenditure on durable goods grew by a mere 2.5% in the fourth quarter. In addition, higher inflation in itself will also curb an expansion in consumption expenditure of households.

Under these conditions, it might be appropriate for Mr. Mboweni to stay put and ride out the current wave of high inflation.


(Click on image to enlarge)


(Click on image to enlarge)