Mboweni warns SA consumers to tighten belts

Mboweni told Parliament's Finance Portfolio Committee that oil and food prices will remain high

South African Reserve Bank governor Tito Mboweni has warned of very difficult times ahead, saying consumers will have to tighten their belts. He says the country is experiencing what he terms second-round effects on inflation from higher food and fuel prices.

Mboweni told Parliament's Finance Portfolio Committee that oil and food prices will remain high, keeping the inflation rate on an upward trend. South Africa's targeted CPIX inflation has surged through the top end of the bank's 3% to 6% and is expected to hit a five-year high of more than 9% year-on-year in February.

Food and fuel
The acceleration is largely driven by food and fuel and has so far not reacted to a series of interest rate increases since June 2006. "Taking out food and energy prices, we still see the trend is on the upside, meaning that we are experiencing some second-round effects arising out of food and energy," he said. "So we have a very difficult time ahead of us. We have to tighten our belts."

Mboweni added that the economy was not in danger of being "overdosed" by higher interest rates, although there are signs that consumer spending is slowing, and he stressed the importance of anchoring inflation expectations on the low side. "Is there a danger of killing the real economy? Well, if there is overdose of any medication it can kill a patient. I don't think we are in the period of overdose now."

Policy must continue
Mboweni also said it was important for South Africa to continue with its policies of prudent fiscal and monetary policy to ensure international confidence in the economy. "For as long as we have prudent macroeconomic policies ... we will continue to finance the current account deficit," he said. South Africa's current account deficit swelled to a near four-decade record of 7.3% of gross domestic product in 2007.

The country's powerful trade unions and the ruling party's communist allies - who backed the campaign of ANC leader Jacob Zuma - have called for inflation targets to be scrapped, interest rates to be cut and spending to rise.

The bank's Monetary Policy Committee (MPC) will meet on April 9 and 10 to decide on the next move on interest rates after leaving the repo rate at 11.0% in January. It increased rates by 400 basis points between June 2006 and December last year. – Additional reporting by Reuters