Mboweni makes amends

Once core inflation is on the way up, the only way to bring it down is by slowing growth below potential and hammering down inflation expectations. And it seems as though at least the central bank governor Tito Mboweni has understood the problem.

This is the view of global analysts Lehman Brothers, who were commenting on the speech given last night by Mboweni at the Gordon Institute of Business Science.

They say they think that the discussion at the next Monetary Policy Committee will be between 50 basis points and 100 basis points hikes, with some members considering more (as seen in the comment about 200 basis points from Mboweni in the speech), but the balance settling with 100 basis points.

Lehman Brothers have devised a "super-core" measure that includes more broad-based items than the published core figure, and they report that it has now shot up from 5.7 percent previously to 6.8 percent in April.

Outside the SARB's target

This is the first time this slow-moving indicator has been outside the SARB's target since the start of 2003. Added to this is pipeline pressures rising, with PPI beating expectations at 12.4 percent in April.

"The meeting will also have the latest (likely very bad) inflation expectations survey. This meeting will be just before the July CPIX number which may contain the Eskom tariff increase (and spike above 12.0 percent in our view), but even if it does not, the SARB's adjusted inflation forecast should move much higher to factor in the energy hikes," says the Lehman Brothers SA research team.

They say, however, that this should signal the peak of the cycle as inflation should start to come down, and they look for rates on hold till the end of 2009, though further hikes are still a possibility as the MPC watches the data closely.

"Downside risks to growth are heightened by this new outlook," conclude the analysts.

The next rates decision in South Africa is scheduled for 12 June

Article By: Evan Pickworth - www.iafrica.com