Inflation pressures repo to 10.5%

The latest increase marks the seventh consecutive rise in the repurchase rate, since the inflationary cycle began in June 2006.

Addressing the media after the Monetary Policy Committee (MPC) meeting Thursday, Reserve Bank Governor Tito Mboweni announced "...the MPC has decided to adjust the repurchase rate by 50 basis points to 10.5% per annum with effect from Friday, 12 October 2007.

"The MPC is determined to ensure that inflation returns to within the target range."

The increase in the central bank's lending rate to commercial banks, will in turn lead to the prime interest rate increasing from 13.5% to 14%.

"Risks to the inflation outlook persist although there are some signs that the economy is responding to the tighter monetary policy stance," said Mboweni.

The National Credit Act, introduced in June this year, was to have encouraged more careful credit spending and credit extension, which was in the long term, expected to have a positive effect on the inflation outlook.

"Inflation reacts with a lag to monetary policy changes, and the challenge for the MPC was to assess whether the observed response will be sustained and sufficient to bring inflation back to within the target range," explained Mboweni.

The rate of inflation has been well above the 3 - 6% range for some months.

"CPIX inflation measured 6.4% in both May and June of 2007 and then increased to 6.5% in July before moderating to 6.3% in August," Mboweni explained.

"Broader underlying pressures remain evident, and if food and energy were excluded, CPIX inflation would have measured 5% in July and August.

"Food prices increased at year-on-year rates of 10.2% and 11.3% in July and August respectively, despite some moderation in meat price increases."

The inflation in services prices continues to rise, measuring 5.8% in August, compared to 4.6% in January 2007.

However, production price inflation declined steadily after peaking at 11.3% in May 2007.

"In August it measured 9.5%, with imported goods inflation and domestic goods inflation measuring 9.7% and 9.3% respectively," said Mboweni.

Both agricultural and manufactured food prices continued to accelerate, indicating further food price pressures at the retail level in the near term.

"Agricultural food prices increased at a year-on-year rate of 22.9% in August, while manufactured food prices increased by 14.9%."

Looking ahead, the central bank governor said the bank's most recent central forecast indicates a modest deterioration in the inflation outlook, particularly in the short term, when compared to the forecast considered at the previous MPC meeting.

"CPIX inflation is now expected to remain above the upper level of the inflation target range and to peak in the first quarter of 2008 at an average of 6.8% before declining to the upper end of the inflation target range in the following quarter."

Thereafter, said Mboweni, CPIX is expected to continue its downward path, and reach around 5.2% by the end of 2009.

"The higher trend results from a higher-than-expected second quarter inflation outcome and revised administered price assumptions."

Article published courtesy of BuaNews