mboweni sets scene for new repo rate rise 
23 May 2008

Monetary policy was facing its “most severe challenge" since inflation targeting was adopted eight years ago, but this did not mean the framework should be discarded, he said.
“We’ve taken strong steps that will allow us to bring inflation back within the target. The possibility of further strong steps being taken can’t be ruled out. The picture is quite worrying.”
Mboweni’s message at a Bureau for Economic Research conference was similar to the one he sent at a public forum last week, when he said the Bank aimed to keep inflation low “come hell or high water”.

Money markets have fully priced in a half-percentage point repo rate hike at its monetary policy meeting next month after raising it 4,5 percentage points to 11,5% since June 2006. BER chief economist Pieter Laubscher, who favours leaving rates unchanged, said Mboweni had as good as said there would be another rate hike in June. Consumer spending the economy’s main growth engine has started to slow in response to rising debt costs, but Mboweni said this was not cause for concern.

“There might be some output losses we’ll have to live with that, but cannot allow a situation where inflation is always rising,” he said.  Inflation measured by the annual rise in CPIX has breached its 3%-6% target for a full year, rising 10,1% in March a five-year peak.

Last month, the Bank forecast it would return to the target by the end of next year, but economists say this may not happen until 2010.  In the full text of his speech on the Bank’s website, Mboweni said the breach of the target was inevitable due to the “rolling shock” of rising global oil and food prices. Increases in local electricity prices were also set to become a multiyear event, he warned.

“These are unusual developments. Unusual responses might be necessary. Things ... might get worse before they get better,” he said.  Inflation targeting was being challenged worldwide, but it would be a mistake to revise SA’s target range upwards or exclude food, fuel and electricity, he said.   Even if there was no exact inflation target, the Bank still had a mandate to keep inflation low, and would still have to do it through the use of monetary policy, he said.

Mariam Isa, www.businessday.co.za