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Johannesburg - Economists cheered the Eskom rate hikes announced by energy regulator Nersa, which were well below the 35% a year that Eskom asked for, saying that inflation would fall below the target this year and there was a chance of further rate cuts.
Nersa has granted Eskom a 24.8% fee increase for this year, a 25.8% increase for next year and 25.9% in 2012. The announcement came soon after the release of higher-than-anticipated inflation figures for January of 6.2%, which added to economists' optimism.
ETM economist Russell Lamberti pointed out that the electricity increase for this year was below the 31% increase recorded last year, so the direct effect on the consumer price index (CPI) would be benign.
He said, however, there would be "second round effects" from the electricity price increase - that is, the effects on prices other than electricity as the costs are passed on. However, he expected the CPI rate to tumble to 4% by the third quarter of this year, well within the Reserve Bank's 3% to 6% target rate.
Lamberti said the economy would not continue growing at the rapid pace of 3.2%, recorded in the fourth quarter of last year. Tepid growth and rapidly falling inflation meant there was a chance the Reserve Bank would cut interest rates.
Standard Bank economist Danelee van Dyk said the Nersa announcement, together with the encouraging January inflation number, may have opened the door for another interest rate cut.
"We now expect an average inflation rate of 5.5% for this year and only 5.2% for next year. The door may be open for the Reserve Bank, but they must act quickly if they're going to act. I'm not predicting that they will cut rates; it's more likely that rates will remain unchanged. But one certainly can't rule a cut out."
The Reserve Bank, which based its inflation forecasts on an increase in Eskom tariffs of 25% a year, forecast in its last monetary policy statement that CPI inflation would moderate from February, returning to within the target range on a sustained basis in March and remaining within the target range until the end of the forecast period in 2011, when it's forecast to average 5.4%.
The treasury's inflation forecast is less optimistic, with Finance Minister Pravin Gordhan saying inflation would average 5.8% this year and will be above the target at an average of 6.1% next year.
The Reserve Bank reduced the repo rate by five percentage points between December 2008 and August 2009, bringing the prime overdraft rate to 10.5%. The bank took this action despite fears over power price hikes, because the economy sank into recession last year.
SA's inflation rate surprised by falling slightly in January, to 6.2% from 6.3% in December. Though the January figure was still higher than the upper limit of the target range, it was better than market expectations of a 6.4% in CPI. Economists said January marked the start of a new period of a downward trend in the inflation rate.
CPI inflation declined from a peak of 13.6% in August 2008 to slightly below the upper limit of the target in October and November (5.8%) last year. The rate increased subsequently, as CPI increases were being calculated off a low base from the previous year.
A striking feature of the latest inflation figures is the fact that food inflation, which had been one of the main culprits behind high inflation in 2008, has fallen dramatically.
The annual rate of increase in food inflation was 2.4% in January 2010. Month-on-month, food prices increased 0.7%, much lower than the corresponding month-on-month increase a year ago. The major impact that the low food inflation has had on the overall CPI rate is clear from the CPI rate excluding food of 7% - well above the target.
- Fin24.com
