South Africa's electricity, water price hikes pose risk to inflation outlook: central bank

JOHANNESBURG: Above-inflation increases in South Africa's electricity and water prices pose a risk to the consumer inflation outlook and could trigger a rise in lending rates, the central bank said on Wednesday.

"These risks, should they materialise, could drive headline above the 4.5% target midpoint and possibly dislodge inflation expectations away from the midpoint," the bank said in its bi-annual Monetary Policy Review (MPR).

The South African Reserve Bank (SARB) targets consumer price inflation of between 3% and 6%, and the rate stood at 2.9% in February.

It said the administered prices consumer price index, which include electricity and water, was projected at 8% in 2021, 5.9% in 2022 and 5.7% in 2023, which was significantly above the 4.5% midpoint.

"As headline inflation returns to 4.5%, the gap relative to the group median is set to rise, increasing South Africa-specific risk perception and leading to generally higher interest rate levels," the bank said.

The SARB slashed lending rates by 300 basis points to a record low of 3.5% in 2020 to soften the impact of the coronavirus on consumers and businesses, as well as to keep a lid on government's long-term rates as bond yields spiked.

It has kept rates unchanged at its last three monetary policy meetings, resisting pressure to match interest rate hikes by other emerging market banks, and some calls locally to lower them further to support the ailing economy.

The SARB added in the MPR release that last year's rate reductions would only "gradually" seep into the economy and become apparent later this year and in 2022.