JOHANNESBURG – South African central bank governor Tito Mboweni sent a strong signal yesterday that the next move in interest rates would be upwards, saying that monetary policy “must not fall behind” the inflation curve.
Mboweni highlighted the risk of second-round inflation effects from rising oil prices in the continent’s biggest economy and noted that food prices were also likely to increase because of drought. “We must not fall behind the curve like we did in 2001.We were behind the curve, we can’t afford this time to be behind,” Mboweni told analysts at a Reuters Economist of the Year breakfast.Inflation started to climb rapidly in 2001 as the rand currency depreciated, but the South African Reserve Bank did not start raising interest rates until January 2002.At a two-day policy meeting last week, the SARB left its key repo rate unchanged at 7 per cent, but warned that the inflation outlook had deteriorated, largely because of high oil prices.In line with this decision, the Bank of Namibia also kept its repo rate at seven per cent.Most South African economists believe that the next move in interest rates will be upwards, but some believe they will remain on hold next year while a few still see scope for another reduction, given the government’s drive to boost economic growth.Mboweni said there had been intense debate at last week’s policy meeting.To underline the point that the time for easing had passed globally, he said had told the monetary policy committee that if anyone argued for a rate cut he would strip.”On the lighter side I told them as I opened the meeting that if any one of them was going to argue for an interest rate cut at the MPC meeting I was going to take off my clothes and stand on the table,” Mboweni said.”I think the spectre of that persuaded many of them not to consider an argument to cut rates.”He also said the issue of whether rising domestic inflation was a result of the so-called “first-round” or “second-round” effect of high global oil prices – a point where the central bank has pledged to act – was largely academic.”If you can see the first indication of inflation picking up on the occasion of high oil prices, surely at some point second round effects will come in,” he said.In reply to a question, the governor said he was concerned about the impact of a regional drought on domestic food prices, which are a big component of the targeted CPIX inflation index.”Food price inflation has been low …but I have my doubts that it will continue the way it is.”The annual increase in CPIX, which excludes home loans, has been inside its targeted three-six per cent range for two years but quickened to 4,8 per cent in August from 4.2 percent in July, its fastest since June 2004.Mboweni highlighted what he described as “radical” changes to the monetary policy committee’s final statement, including the omission of a previously used clause saying that the central bank was ready to adjust rates in “either direction.”In its statement at the last meeting, the bank simply said it was ready to take “appropriate action” to ensure that its inflation mandate was met, said.Mboweni also pointed out that the statement said it was not seen as necessary to change the monetary policy stance “at this meeting”.”You will be the judge of the way interest rates go this time,” Mboweni said.The central bank reduced its repo rate by 6,50 percentage points between June 2003 and April this year as inflation subsided, driving prime lending rates set by commercial banks to their lowest level in more than two decades.Mboweni said growth in South Africa’s economy was strong in the second quarter of 2005, but indications since then were that it was “slightly more subdued”.Official figures show that gross domestic product expanded by 4,8 per cent in the second quarter of the year, up from 3,5 per cent in the first quarter.-Nampa-Reuters”We must not fall behind the curve like we did in 2001.We were behind the curve, we can’t afford this time to be behind,” Mboweni told analysts at a Reuters Economist of the Year breakfast.Inflation started to climb rapidly in 2001 as the rand currency depreciated, but the South African Reserve Bank did not start raising interest rates until January 2002.At a two-day policy meeting last week, the SARB left its key repo rate unchanged at 7 per cent, but warned that the inflation outlook had deteriorated, largely because of high oil prices.In line with this decision, the Bank of Namibia also kept its repo rate at seven per cent.Most South African economists believe that the next move in interest rates will be upwards, but some believe they will remain on hold next year while a few still see scope for another reduction, given the government’s drive to boost economic growth.Mboweni said there had been intense debate at last week’s policy meeting.To underline the point that the time for easing had passed globally, he said had told the monetary policy committee that if anyone argued for a rate cut he would strip.”On the lighter side I told them as I opened the meeting that if any one of them was going to argue for an interest rate cut at the MPC meeting I was going to take off my clothes and stand on the table,” Mboweni said.”I think the spectre of that persuaded many of them not to consider an argument to cut rates.”He also said the issue of whether rising domestic inflation was a result of the so-called “first-round” or “second-round” effect of high global oil prices – a point where the central bank has pledged to act – was largely academic.”If you can see the first indication of inflation picking up on the occasion of high oil prices, surely at some point second round effects will come in,” he said.In reply to a question, the governor said he was concerned about the impact of a regional drought on domestic food prices, which are a big component of the targeted CPIX inflation index.”Food price inflation has been low …but I have my doubts that it will continue the way it is.”The annual increase in CPIX, which excludes home loans, has been inside its targeted three-six per cent range for two years but quickened to 4,8 per cent in August from 4.2 percent in July, its fastest since June 2004.Mboweni highlighted what he described as “radical” changes to the monetary policy committee’s final statement, including the omission of a previously used clause saying that the central bank was ready to adjust rates in “either direction.”In its statement at the last meeting, the bank simply said it was ready to take “appropriate action” to ensure that its inflation mandate was met, said.Mboweni also pointed out that the statement said it was not seen as necessary to change the monetary policy stance “at this meeting”.”You will be the judge of the way interest rates go this time,” Mboweni said.The central bank reduced its repo rate by 6,50 percentage points between June 2003 and April this year as inflation subsided, driving prime lending rates set by commercial banks to their lowest level in more than two decades.Mboweni said growth in South Africa’s economy was strong in the second quarter of 2005, but indications since then were that it was “slightly more subdued”.Official figures show that gross domestic product expanded by 4,8 per cent in the second quarter of the year, up from 3,5 per cent in the first quarter.-Nampa-Reuters
