SA Reserve Bank governor Lesetja Kganyago expressed concern on Thursday over Eskom’s extra tariff hike request to a total 25.3% increase for the 2015/16 financial year.
He said at the end of the bimonthly Monetary Policy Committee meeting on Thursday that the MPC, in a split decision, decided to keep the repurchase rate on hold at 5.75%.
Four members of the committee favoured an unchanged stance while two favoured a 25 basis point increase.
Kganyago said the headline inflation forecast assumes electricity price increases of 13% from July 2015 and July 2016 in line with the original multi-year price determination process of energy regulator Nersa.
However, the application by Eskom for a further 12.6% increase from 1 July 2015 will be decided at the end of June.
“Given the uncertainty regarding this decision, both in terms of quantum and timing of implementation, it has not been incorporated into the forecast, but poses a significant upside risk. ”
Should Nersa fully accede to the Eskom request, a higher peak of headline inflation as well as a more extended breach of the target can be expected.
“The direct and indirect effects of such an increase could increase average inflation by around 0.5 percentage points over a year,” he said.
Kganyago listed electricity tariff increases, the exchange rate and wage settlements as the main risks to the outlook, sating that significant additional electricity tariff increases are likely to cause inflation to diverge significantly from the target range for a more extended period than the MPC’s baseline forecast suggests.
He said the rand remains vulnerable to global market reaction to US policy normalisation, particularly in the context of South Africa’s twin deficits.”
Any significant weakening of the exchange rate in reaction to US monetary policy tightening could cause inflation to diverge even further from target, and set in motion an exchange rate-inflation spiral.
“Furthermore, the possibility of a wage-price spiral, should settlements well in excess of inflation become an economy-wide norm, also poses a risk to the outlook.
“On economic growth, Kganyago said the domestic outlook remains weak, amid continued electricity supply constraints and low and declining levels of business and consumer confidence.
“The bank’s forecast for GDP growth is marginally down from the previous forecast: growth is expected to average 2.1% and 2.2% in 2015 and 2016, and to increase to 2.7% in 2017.
“Growth for the next two years therefore is expected to be more or less in line with our estimate of short-term potential output growth of between 2.0% and 2.5%.”
The next MPC meeting will be in July.