Johannesburg - The Reserve Bank could struggle to contain inflation in 2010 if Eskom is granted the 45% tariff hike it has asked for, according to outgoing Reserve Bank governor Tito Mboweni.
The bank forecast the headlining consumer price index (CPI) inflation measure to return within the 3% to 6% target band by the middle of 2010; this is when a 25% electricity tariff increase is factored into projections.
"No adjustment has been made for a further electricity increase," said Mboweni, addressing media at his final monetary policy committee (MPC) statement.
The MPC chose to leave the key repo rate unchanged at 7% after it judged there had been no changes to the immediate inflation outlook. Further tariff hikes from the power utility pose the biggest risk to South Africa's medium-term inflation outlook.
"If there's a further 25% increase in energy rates, I have no doubt the outcome will be much worse," he said.
"We are concerned, but there's nothing much we can do about it - we have to live with it."
Mboweni said South Africa should be sympathetic to the difficulties Eskom has to confront in its expansion drive.
"We are not condemning Eskom at all," he said.
The national electricity regulator will decide whether Eskom can proceed with the desired 45% tariff increase in February 2010.
The decision to leave interest rates unchanged surprised few. Several economists hold the view that the Reserve Bank has reached the bottom of the monetary policy easing cycle.
Slow, unsteady recovery
"I think we have now reached the bottom of the cycle. I think we are going to see interest rate hikes during the middle of next year," said Mike Schüssler of Economist.co.za.
"We are also going to have to get used to higher inflation rates," he added.
The minority view in the market is that there could still be one further interest rate cut. This view is based on the fact that economic data, particularly from the retail and manufacturing sectors, have pointed to a slow and unsteady recovery for South Africa.
"Should the economy continue to shed jobs, which will put further downward pressure on domestic demand over the coming months and dampen the recovery, the MPC may believe that it would be prudent to cut rates again," said Carmen Altenkirch, senior economist at Nedbank.
"We still believe that there is one more cut this cycle - although predicting the exact timing will be difficult," she said.
Thursday marked Mboweni's final interest rate statement as governor. He joined the central bank in 1998 as adviser to Chris Stal, who was governor at the time. Mboweni stepped into the governor's role in 1999.
"I have had some good innings here; I have enjoyed it very much," he said. "But I am relieved to be retiring."
Mboweni is succeeded by Gill Marcus, who will take over the Reserve Bank in early November.
- Fin24.com