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Eskom hike 'will affect rates'

By unknown | May 08, 2008 | COMMENTS [ 0 ]

Brendan Boyle

Brendan Boyle

Reserve Bank governor Tito Mboweni was right to punish South Africans for their free spending ways, economists said yesterday, but they differed on whether consumers should take more interest rate pain on Eskom's behalf.

RMB economist Rudolf Gouws, citing the narrowing gap between interest rates and soaring inflation, said Mboweni's monetary policy committee probably would apply at least one more rate increase next month if the National Energy Regulator approved Eskom's request for a 60percent price hike.

Gouws said South Africans had racked up massive domestic and foreign debts visible in the local credit extension statistics and in the current account deficit as spending exceeded growth.

"We like spending a lot more than we like working," he said.

As long as confidence remained high and foreign investors kept pumping money into the country, the debt levels could be sustained. But as economic conditions turned sour, there would be greater pressure on economic balances, he said.

South Africa needs investment inflows of about R3billion a week to cover a current account deficit equal to almost 7percent of gross domestic product.

"I don't think you can accuse the Reserve Bank of killing the economy with high interest rates," said Gouws.

Sanlam's Jac Laubscher, in a note to clients, argued for a revision of the inflation targeting mechanism, which requires the Bank to pursue a CPIX rate - inflation minus the cost of mortgages - of three to six percent.

"It is senseless to expect the Reserve Bank to pursue an irrational target in the context of weaker growth," he said.


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