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Cablegate: South African Reserve Bank Talks Tough On Inflation

VZCZCXYZ0004
RR RUEHWEB

DE RUEHSA #1053/01 1401302
ZNR UUUUU ZZH
R 191302Z MAY 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4487
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS PRETORIA 001053

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN SF
SUBJECT: SOUTH AFRICAN RESERVE BANK TALKS TOUGH ON INFLATION


1. (SBU) Summary: Inflation continues to rise in South
Africa. Food and fuel prices are the major culprits, but
there are signs that inflationary pressures are becoming
generalized. South African Reserve Bank Governor Tito
Mboweni advocates tighter monetary policy, even though the
economy is already slowing down after nearly two years of
interest rate hikes. South Africa may have entered a period
of high inflation and high interest rates, with GDP growth
falling below 4.0 percent per year. End Summary.

-------------------------------------
Doing What It Takes to Whip Inflation
-------------------------------------

2. (SBU) South African Reserve Bank (SARB) Governor Tito
Mboweni believes that higher interest rates are needed to
curb inflation in South Africa, even though GDP growth is
already slowing down in response to a series of nine
50-basis-point interest rate hikes since June 2006. Mboweni
delivered his tough words on inflation at the SARB's Monetary
Policy Forum in Pretoria on May 13. Warning the crowd of
economists and financial analysts that inflation is
continuing to mount in South Africa and many other countries,
he said, "These are tough times for central banks all over
the world. We (SARB) will get tough, too." He left no doubt
about where he stood on interest rate policy, saying,
"Monetary policy will get tighter if I have my way." Note:
The Monetary Policy Forum is a semi-annual public event where
SARB officials review the inflation outlook and explain
monetary policy. End Note.

3. (SBU) Mboweni spoke after SARB officials had reported
that CPIX inflation (CPI less mortgage interest) was 10.1
percent (y/y) in March. This was notably higher than the
rate of 9.4 percent (y/y) in February, and well above SARB's
inflation target of 3.0-6.0 percent for the twelfth
consecutive month. The officials singled out food and energy
prices as the main culprits behind the higher prices, but
they warned that signs of generalized inflation are now
emerging in the economy. They noted that even when food and
energy prices are excluded from CPIX, inflation increased
from 4.9 percent (y/y) in September 2007 to 5.6 percent (y/y)
in March 2008.

4. (SBU) Taking questions after the technical presentation,
Mboweni re-emphasized the point that inflationary pressures
are no longer limited to food and fuel, saying, "Inflation is
now generalized." He pledged that SARB will take firm steps
to "anchor" inflation expectations in coming months. "I
promise you: We will do this come hell or high water."

--------------------------------------
Inflation-Targeting, Whatever the Name
--------------------------------------

5. (SBU) Mboweni also fended off criticism that South
Africa's inflation-targeting policy has tied SARB's hands and
forced it to use interest rates to battle inflation caused by
supply shocks, not demand pressures. "All credible central
banks keep inflation at low levels," he explained. "We have
no choice but to keep inflation in line with inflation in our
major trading partners, especially Europe. It doesn't matter
whether we call it inflation-targeting or something else."
Inflation-targeting remains government policy, he said.
Note: Labor unions and some business groups have been
sharply critical of South Africa's inflation-targeting
policy, which they believe has dampened growth. The new ANC
leadership has called for a national debate on the issue.
End Note.

----------------------------
Higher Prices, Slower Growth
----------------------------
Q----------------------------

6. (SBU) In meetings with Deputy Economic Counselor,
economists at Absa Capital and Barnard Jacobs Mellet had no
doubt that the policy interest rate will be raised at the
next meeting of SARB's Monetary Policy Committee in June.
"Given what Mboweni said, rates might go up 100 basis
points," one said. Both were skeptical that CPIX inflation
would fall back within the target band by the end of 2009, as
SARB currently forecasts. They warned that South Africa has
apparently entered a period of high inflation and high
interest rates that could last through 2010, or even 2011.
In this environment, annual GDP growth would probably not
exceed 4.0 percent, especially given the uncertainties about
power supply. The economists agreed, though, that loose talk
of a recession is "ridiculous," as high commodity prices and
strong public sector investment would prop up growth. Note:
Growth averaged 5.0 percent per year from 2004 to 2007. End
Note.

-------
Comment
-------

7. (SBU) Mboweni's warning that SARB will do whatever it
takes to anchor inflation expectations is aimed, in part, at
upcoming wage negotiations in key sectors, where unions are
pressing for double-digit wage increases to offset higher
consumer prices. There is concern in SARB that unrealistic
wage settlements could fuel generalized inflation pressures.
BOST

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