Power an inflation pain

Fri, 13 Jun 2008

The possible hike in electricity prices is one of the biggest risks to the country's inflation outlook, SA Reserve Bank Governor Tito Mboweni said on Thursday.

The Central Bank hiked the repo rate by 50 basis points to 12, Mboweni said following a Monetary Policy Committee meeting.

This raised the prime rate that banks charge their clients to 15.5 percent.

"The outlook for inflation remains bleak in an environment of sustained increases in international oil and food prices.

"Adding to the inflation uncertainty is the impending announcement of the electricity price increases to be granted to Eskom," Mboweni said.

CPIX inflation was expected to peak around 12 percent in the third quarter of 2008 and only return to the inflation target range of three to six percent by the third quarter of 2010.

"The deterioration in the forecast was as a result of higher-than expected inflation outcomes, a more depreciated exchange rate of the rand as well as further upward revision in international oil price projections over the forecast period," Mboweni said.

He however said the MPC did not factor into its central forecast the tariff increases that could be granted to Eskom.

The National Energy Regulator of SA (Nersa) would announce its decision on Eskom's request for a 53 percent electricity price hike next week.

"Depending on what decision is made our scenarios might change quite significantly," Mboweni said.

He said the other main risks to the inflation outlook were increases in petrol and food prices and the exchange rate.

Despite the upside risks, there were a number of offsetting effects due to rate hikes over past months, Mboweni said.

These included a decline in the household spending, moderation in credit extension to the private sector and a slowdown in the economy.

The outlook for the global economy remained uncertain.