Zimbabwe: Oil Price Hampers Efforts to Contain Inflation

Zimbabwe: Oil Price Hampers Efforts to Contain Inflation

South African Reserve Bank governor Tito Mboweni said the price of oil is unlikely to drop any time soon, hampering efforts to contain inflation and adding to pressure for higher interest rates.

“On the inflation picture, what is of serious concern is that it doesn’t seem like oil prices are going to be of assistance to us for a while,” Mboweni told lawmakers in Cape Town yesterday.

“Things are going to get tough before they get better. We have a very, very difficult time ahead of us. We have to tighten our belts.”

The Reserve Bank has missed its inflation target of 3 percent to 6 percent since April last year, even after it raised the benchmark interest rate to a four-year high.

The rand’s 15 percent slump against the dollar this year and a proposed 60 percent increase in electricity prices threaten to fuel inflation, raising pressure on the bank to lift its benchmark interest rate from the current 11 percent next month.

The bank will “take whatever action is necessary to anchor inflation expectations on the low side,” Mboweni said. “If there is an overdose of any medicine, there is a danger of killing the patient. I don’t think we are in that situation now. We have seen much higher interest rates.”

State-owned power utility Eskom Holdings Ltd. plans to spend 343 billion rand (US$42 billion) on expanding its capacity over the next three years as demand for power outstrips supply in Africa’s largest economy.

The utility has asked for permission to boost tariffs 60 percent in the year starting April 1, more than the 14 percent initially approved by the National Electricity Regulator.

“We have lived in long period of low-cost electricity and we are too much accustomed to it,” Mboweni said. “I know there are going to be very serious once-off base effects on inflation” as a result of the price increases.

Crude oil rose for a second day in London today, advancing as much as 0,7 percent to US$101,96 a barrel. Oil has gained 62 percent over the past 12 months.

The higher oil price has translated into increases in the prices of other goods, known as “second-round inflation,” Mboweni said. “If you remove food and energy, pressure is still on the up side. It’s not the nicest time to be a central bank governor.”


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