The Bank said steep international oil prices were mainly to blame for the trend, but it cited rising food costs as another big concern, along with what it called a “tentative” consumer response to higher interest rates.
“Although inflation is still expected to remain within the target range for the forecast period it is likely to remain close to the upper end … over the coming months,” the Bank said.
“In the event of significant adverse developments in the main determinants of inflation or an insufficient response to the previous monetary tightening, the target could be threatened,” it said in its biannual policy review.
The hawkish tone of the report signalled that the central bank was prepared to hike interest rates again to keep the annual increase in its CPIX inflation benchmark below 6%.
That measure leaped to 5,5% in March from 4,9% in February, its highest since August 2003.
In its policy report, the Bank highlighted risks to SA’s shifting inflation outlook, while repeating it would not respond to the “first-round” effects of external pressures such as higher petrol prices.
“Monetary policy remains strongly focused on keeping inflation within the target range, and in the coming months the MPC (monetary policy committee) will be assessing the inflation outlook in the light of unfolding developments,” the Bank said.
Opinion is divided on whether the Bank will lift the repo rate again at its next policy meeting.
In its review yesterday, the central bank repeated almost word for word the inflation forecast it unveiled at its monetary policy meeting last month when it kept interest rates steady.
The annual CPIX rate would climb to just below the upper end of its 3%-6% target in the second quarter of this year, decline on technical factors in the third quarter and then nudge back near 6% until the first quarter of next year, it said. Then it would gradually subside to 5%.
But the Bank pointed out it had “paused” in the interest rate cycle only because over the past few months a significant fall in international oil prices and relative exchange rate stability had improved the inflation outlook.
“More recently, there has been some deterioration in the inflation outlook. The major cause has been the reversal of the oil price trend,” it said.
Credit extension by banks to the private sector continued to rise at “uncomfortably high rates”, and remained a source of concern, as did growth in household consumption expenditure.
Domestic demand has been the main driver of faster growth in SA’s economy, which reached an average annual rate of 5% over each of the past three years. The Bank did not predict a slowdown.
“Economic growth is likely to remain robust until 2009, underpinned by a strong trend in growth of investment expenditure,” it said.
“Consumer demand, which has been resilient and remains buoyant is, however, likely to slow somewhat during the year as the effects of previous monetary policy actions become more apparent.”
The Bank also said labour costs rose by an annual rate of 5,9% in the fourth quarter of last year, from 5,2% in the third quarter.
