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