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Johannesburg - South African central bank governor Tito Mboweni said on Wednesday "drastic measures" were needed to bring down inflation, and signalled that monetary policy had to tighten further.
Statistics South Africa said earlier on Wednesday that CPIX consumer inflation accelerated to a near 5-1/2-year high of 10.4% year-on-year in April from 10.1 percent in March. It has stayed above a 3 to 6 percent target range since April 2007.
"You don't have to be a genius to tell that interest rates have to tighten. When CPIX is above that (target) range, clearly drastic measures have to be taken," Mboweni said at a seminar in Johannesburg.
Asked what he meant by 'drastic', Mboweni did not elaborate but said he had casually discussed a 200 basis points increase with a colleague.
The central bank has since June 2006 raised the repo rate on nine occasions - by 50 basis points each time - to 11.5%.
Dealers said earlier on Wednesday the market had fully priced in a 50 basis points increase in June, but could price in a bigger increase closer to the June 11-12 central bank meeting.
The central bank has previously said if electricity prices did not go higher, it saw inflation coming back to the target band by the end of 2009.
State power utility Eskom [ESCJ.UL} has asked for a 53% tariff hike, which if granted, could keep CPIX outside the target band for longer.
"A central bank that misses its target for long periods of time loses its credibility. A central bank has to tighten in that case," Mboweni said on Wednesday, adding the bank was committed to price stability.
Price stability
"Even if there was no inflation targeting we would still pursue price stability and the danger with that is we would target two percent. But the politicians set the target between 6% and 3%," Mboweni said.
Mboweni said South Africa's consumer inflation needed to be in line with its trading partners such as the European Union.
"In reality South Africa's inflation must not be much higher than that of the EU. If we want to play in the big leagues, that is what it must be."
Mboweni said that a new government of the African National Congress would likely maintain the policy of inflation targeting after next year's election.
South Africa goes to the polls in 2009 and the ruling ANC is expected to win a majority in parliament as it continues to dominate domestic politics, more than 14 years after the end of apartheid.
"Inflation targeting is a very good thing. Even the new administration that will come in, in April next year, will probably think very seriously about maintaining it. I've been talking to some of them and the majority of them understand," he said.
Leftist allies of the ANC have said the central bank's raising of interest rates to fight inflation was strangling economic growth.
Since Jacob Zuma took the leadership of the ANC in December with strong support from the unions, some investors have been worried that economic policy would shift to the left after next year's election.