Johannesburg - South Africa's inflation outlook will change substantially should power utility Eskom secure a 45% tariff hike every year for the next three years, the SA Reserve Bank (Sarb) has warned.

Reserve Bank deputy governor Brian Khan told parliament's finance committee on Thursday the effect of these increases on inflation would be major. Instead of moving into the target range (3% to 6% change in the consumer price index) as Sarb had predicted earlier, inflation would "move very quickly outside the target".

Khan said the bank's inflation forecast did not include the proposed 45% annual hike. Sarb's forecast is modelled on 25% increases, as was suggested by energy regulator Nersa prior to Eskom's most recent application.

While the first-round inflationary effects of a substantial power tariff increase were relatively easy to project, Khan said the secondary effects would be less predictable.

But he said that there was "no doubt" that the secondary effects would put upward pressure on inflation, especially as electricity was a "very pervasive" input into the economy which also had a large impact on people's discretionary spending.

However, Khan said the Sarb is confident Eskom will not be successful in its application. "Because indications are that the Eskom application [for 45% annual increases in electricity fees] are under review, we have kept our forecast the same," he said.

Without the 45% tariff increase, Sarb expects inflation to decelerate to 6.1% in the fourth quarter of 2009. It should increase marginally in the first quarter of 2010, before moving below the upper level of the inflation targeting range in the second quarter.

It is then expected to remain within the inflation targeting range, fluctuating between 5.3% and 5.9% until the end of 2011.

- Fin24.com