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Rate hike may not be the right medicine
THE ECONOMY
THE threat of double-digit inflation spurred the Reserve Bank into action this week, with the Bank rate being raised one percentage point. But economists doubt that the tough stance will have the desired effect of cooling down the recent high price increases. In particular, they fear the rate hike will not result in a steadier rand exchange rate. This week the Central Statistical Service reported that inflation rose to 9,1% in October from 8,4% in September, its highest level in 14 months and well above economists' forecasts of about 8,8%. Economists are concerned that the sharp acceleration in food prices in recent months could push inflation to about 10% for both November and December. Chief economist at stockbrokers Huysamer Stals, Johan Rossouw, who correctly forecast the October inflation figure, expects the rate to rise to 9,8% in November and to stay at a similar level in December, which would result in average inflation of 7,5% for the year. The main culprit is food. Food prices increased by an average of 2,1% between September and October and by 12,4% year on year. For November, Rossouw expects the food component to increase further to 13,9% on an assumed 2,1% monthly rise. The spur to further price hikes later this year and in early 1997 is the weak rand. In announcing the Bank rate hike, Reserve Bank governor Chris Stals warned: "To depress the unavoidable inflationary pressures arising from the excessive depreciation of the rand over the past year, decisive action is now necessary to restore both external and internal financial stability." However, previous interest rate increases have failed to stem the short-term capital outflow leading the attack on the rand. Instead, argue economists, foreign dealers need to be convinced of the government's willingness to implement its economic plan. A commitment to privatisation and abolishing foreign exchange control would have a more beneficial effect on the rand, they say.
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