A tight spot for South Africa

Signs are pointing to another rise in South Africa's key repurchase rate on Thursday, when the Reserve Bank's Monetary Policy Committee concludes its deliberations.

Both Bank Governor Tito Mboweni and the MPC are in a bit of a tight space over their inflation-targeting regime. Since April, the CPIX inflation rate -- a Consumer Price Index excluding interest rates on mortgage bonds -- has been in breach of the 3-6% target band.  The MPC responded by raising the repo rate to 9.5% in June.  The rate had already risen from 7.0-9.0% over the second half of 2006, but the tightening did not seem to affect private sector demand, which has remained persistently strong.  This has been a key part of the MPC's argument for continuing to raise rates. 

Yet, Mboweni faces another dilemma, stemming from the fact that the core drivers of price inflation have been food and fuel costs.  Both have been pushed by exogenous factors, which the MPC cannot control.  This calls into question the efficacy of the MPC's entire inflation targeting regime, and has drawn some domestic criticism.  Nevertheless, Mboweni is likely to stick to his guns next week, and raise rates to 10.0%.