Bank has built 25% Eskom hike into targets

An electricity tariff increase of 25%-30% would have only a marginal e ffect on the Reserve Bank’s inflation targets over the medium term, a top Bank official said on Tuesday in the run-up to Wednesday announcement by the National Energy Regulator of SA (Nersa) about its decision on Eskom’s tariff application.

Eskom applied for a 35% increase for each of the next three years, raising concern not only about the effect of the hike on inflation, but also on the cost of doing business.

The Bank has forecast that the inflation rate would remain within the 3%-6% inflation targeting band until the end of next year, moving towards the upper end of the range at about 5,5% at that time.

Adviser to the Reserve Bank governor Brian Kahn told Parliament’s finance and appropriation committees the Bank had built a 25% hike into its modelling.

However, if the increase was markedly higher than this, it would put upward pressure on the Bank’s inflation forecasts and cause multiple shocks over the next three years.

In such an event it would focus on dealing with the second- round effects rather than dealing with something irreversible. A much larger tariff hike represented the single-biggest risk to the inflation outlook.

With global inflation being very low, the Bank did not expect there to be imported inflation in the year ahead.

Wage settlements were also expected to be lower in nominal terms in the coming months because of the high level of unemployment and the state of the economy.

The Bank also did not believe the 25c increase in the fuel levy announced by Finance Minister Pravin Gordhan would have a material effect on inflation forecasts and the Bank’s monetary policy stance.

He said the Bank would prefer a stable, competitive exchange rate for the rand. He believed the value of the currency would be a neutral contributor to the inflation outlook, neither appreciating or depreciating to any great extent.

“We are fairly neutral on the exchange rate and we don’t see it providing an upside or a downside risk in terms of the inflation outlook,” he said.

The appreciation of the rand over the last year (28% against the dollar) had contributed to the decline in inflation. Reserve Bank governor Gill Marcus warned against pegging the value of the rand, pointing to the limited room for manoeuvre that the euro imposed on Greece and Spain in their attempts to deal with their debt crises as they were not able to devalue their currencies.

Kahn suggested that the difference in the 2010 economic growth forecasts of the Treasury (2,3%) and the Bank (2%) could be due to technical differences in their models. Marcus told MPs that the new mandate given to the Bank by Gordhan meant it would not have to impose “extreme adjustments” to get the inflation rate back into the inflation targeting band in the shortest possible time, though it had to anchor inflation expectations.

The Bank would have to take into account factors such as job creation, economic growth and the exchange rate, she said.

Source:  www.businessday.co.za, 20100224

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