This is the highest level inflation has reached since September 2003.
“Having considered recent developments, the MPC has decided that a further adjustment in the monetary policy stance is required in order to ensure that CPIX inflation returns to within the target range,” said Xolile Guma, Deputy Governor of the Reserve Bank in Pretoria on Thursday. “Accordingly, the repo rate is adjusted by 50 basis points to 10% per annum with effect from 17 August 2007.”
This in turn has led to commercial banks adjusting their prime interest rate to consumers to 13% from 12.5%.
Speaking on behalf of Governor Tito Mboweni, who attended the two-day MPC meeting, but could not attend the announcement, Guma said the main causes of the upward trend in inflation remain food and energy, but broader underlying pressures are also evident.
Food prices increased at year-on-year rates of 9% and 9.4% in May and June 2007 respectively, with grain product prices increasing by 13.4% in June. In addition, the prices of agricultural goods have been increasing at year-on-year rates of almost 20% since March 2007.
“Food prices remain a threat to the inflation outlook despite the declining trend in meat price increases. High rates of increase in the spot prices of maize and wheat during the first half of this year are expected to sustain the higher food inflation,” said Guma.
Petrol prices increased at year-on-year rates of 13.7% in May and 11.1% in June as a result of a cumulative increase of R0.57 per litre in these two months.
The MPC shared the view of ABSA senior economist analyst Chris Hart, who told BuaNews earlier this month that it would be too soon to see the impact if any, of the National Credit Act (NCA) on inflation.
“Growth in credit extension to the private sector remains high, and it is premature to assess the impact on credit extension of the introduction of the National Credit Act in June,” said Guma.
“Twelve-month growth in banks' loans and advances extended to the private sector increased at a rate of 27.9% in June.”
Growth in loans and advances to the corporate sector measured 36.2% in June, compared to 33.3% in May, while growth in credit extended to the household sector moderated from 22.8% in May to 21.5% in June.
Recent wage negotiations in the public and private sectors have also left their imprint on the inflation outlook.
“Wage settlements have been trending upwards. According to Andrew Levy Employment Publications, the average level of wage settlements measured 6.5% in 2006. In the first half of 2007, wage settlement rates have averaged 6.8%, but a growing number of recent settlements have been closer to 8%,” said the Deputy Governor.
This may still be consistent with the inflation target, he explained, if labour productivity growth is accounted for.
“Nevertheless the upward trend is of some concern given the importance of wage developments in the price formation process.”
Government has an inflation target band of between 3 and 6%, which has been breached for the third consecutive month.
Official forecasts from the Bureau for Economic Research indicate that inflation will once more fall within the range, by the second quarter of 2008.
Article published courtesy of BuaNews
