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'TIGHTEN your belt'

By unknown | May 23, 2008 | COMMENTS [ 0 ]

Brendan Boyle

Brendan Boyle

Things may get worse before they get better, Reserve Bank governor Tito Mboweni warned South African consumers yesterday in a new signal that interest rates may rise again next month.

But he said a 60percent electricity price hike should not be part of their woes.

He told business leaders at a meeting organised by the Bureau for Economic Research that inflation targeting helped to explain the Bank's policies to consumers and to government.

"It means that the politicians have to ensure that they do not take any actions which might run contrary to the achievement of the inflation target.

"So you can't sit in Cabinet, agree on inflation targets and go out and want to increase electricity prices by 60percent. It does not make sense," he said.

The National Electricity Regulator starts public hearings today on Eskom's application for a 60percent tariff hike this year and a 50percent rise next year.

Mboweni said the economy was starting to respond to tightening monetary policy, but people were not getting the message that the central bank was committed to getting price growth well under control.

He defended inflation targeting as a mechanism to anchor public price expectations at about half the current rate of inflation of about 10percent.

He said the Bank's Monetary Policy Committee had raised rates in reaction to the secondary effects of soaring global food and oil prices and not in response to those increases themselves.

The committee has raised the repo rate charged to commercial banks nine times since June 2006 from seven percent to 11,5percent, pushing the prime rate that banks charge their own customers to 15percent.

The effect of soaring prices on people's price expectations had become the Bank's major challenge, he said.

"The possibility of further strong steps being taken cannot be ruled out.

"Things might even get worse before they get better. Maybe we should brace ourselves ... fasten the seat belts," Mboweni said.

The committee announces its next rate decision on June 12. Most economists expect it to hike the repo rate by at least 50 basis points to 12percent.


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