Bloomberg News

South African Central Bank Wary of Second-Round Inflation

June 23, 2011

(Updates with chief economist’s comments starting in second paragraph.)

June 23 (Bloomberg) -- South Africa’s central bank said it has seen no evidence that higher fuel and food prices are translating into more generalized inflation.

“We haven’t see the second-round effects,” Monde Mnyande, the bank’s chief economist, said today in an address at an event hosted by the University of Stellenbosch’s Institute for Futures Research in Cape Town. “We are monitoring those very closely and we will definitely act as soon as we start to see them.”

The central bank warned price pressures were intensifying when it left its benchmark interest rate unchanged at a 30-year low of 5.5 percent on May 12. The bank says it expects inflation to average 5.1 percent this year and 6 percent in 2012. Policy makers, who will announce their next interest-rate decision on July 21, are tasked with keeping inflation within a 3 percent to 6 percent band.

Inflation accelerated to 4.6 percent last month, the fastest pace in 12 months, from 4.2 percent in April as fuel costs rose, the government statistics agency said yesterday.

“I don’t think inflation is going to be coming down,” Mnyande said. “Consumer prices are likely to remain on the side of the upper limit of the target range.”

Inflation Basket

The government said in April that it plans to change the weighting of items in the inflation basket from September of next year.

“The weighting on electricity is still relatively low” in the formula and if it is increased, there could be a negative impact on inflation, Mnyande said.

State-run Eskom Holdings Ltd., which supplies about 95 percent of South Africa’s electricity, is raising prices to fund expansion and prevent a repeat of 2008 power cuts. The state regulator allowed Eskom to raise tariffs 26 percent this year.

South Africa’s widening current-account gap was “worrying,” Mnyande said. “The consequences of a huge current account deficit could also manifest itself in inflationary pressures.”

The shortfall in the current account, the broadest measure of trade in goods and services, expanded to 3.1 percent of gross domestic product from a revised 1 percent in the previous three months, the Reserve Bank said in its Quarterly Bulletin released on June 21. The wider deficit was attributed to a drop in exports caused by weaker global demand and a decline in coal shipments, and increased imports.

--Editors: Philip Sanders, Heather Langan

To contact the reporter on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.


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