Think-tank calls on Reserve Bank to lift rates ahead of electricity tariff increase

ECONOMIC think-tank Nomura has called on the SA Reserve Bank (SARB) to start a rate hike next month in anticipation of a possible 12.69 percent electricity tariff increase as the other 12.61 percent that makes a 25.3 percent can only be levied in the next fiscal year.

Nomura said the bank had to plan for the electricity increases, additional bailout component, wage inflation expectations, the rising energy basket, retail push on costs and, more urgently, US Federal Reserve decisions.

Nomura projected last week that additional inflationary pressures in the next financial year from the 12.61 percent of Eskom’s tariff hike, along with the 13 percent bailout tariff and reciprocal effects of next month’s tariff hike, would com- pound misery for consumers.

“We believe the Nersa (National Energy Regulator of South Africa) announcement at the end of this month will not be evident in the Consumer Price Index (CPI) until next year, but the SARB should be sufficiently concerned at the implications on expectations and still hike rates,” Nomura’s Peter Attard Montalto said in a note last week.

Application

Nomura said it believed that the government backed Eskom in its 25.3 percent application and that the utility would be awarded it when the energy regulator made its decision at the end of the month.

In May, Eskom lodged an urgent application for the reopening of the third multi-year price determination.

In the application, Eskom

The think-tank said households would definitely have a 12.69 percent (equivalent) tariff increase from 1 July.

Nomura said the situation had been made inevitable by the apparent failure of the National Treasury to make a regulatory exception for changing the regulations to allow intrayear tariff changes, so that Eskom could get its tariff applied to all customers within the current fiscal year.

“We think it is a fair assumption that union inflation expectations and so wage de- mands will adjust more rapidly and earlier, as will retailers getting ready to push through additional costs,” Nomura said.

Meganomics economist Collen Garrow said factors such as the energy basket of rising oil prices, increasing fuel prices, the weak exchange rate and workers’ higher wage call were all inflationary and would weigh on the Monetary Policy Committee (MPC) decision.

Garrow said the case for a rate increase was close. Even at the last MPC in March, there was a strong vote in favour though it was overwhelmed by the majority rule.

Another increase

He said he foresaw a 25 basis point increase in July and another 25 basis point increase in November this year or just starting off with a 50 basis point increase now.

“The SARB must invoke the flexibility of its mandate, they can’t sit and wait, in July the utility basket is going up,” Garrow said.

Bureau of Economic Research economist, Hugo Pien- aar agreed, saying the Reserve Bank had become more pessimistic about inflation hence there was a high possibility of a July interest rate hike.

He said the rand volatility against the major basket of currencies would force the Reserve Bank’s hand.

“With the rand this volatile, it’s actually under pressure against a basket of currencies, the oil price that is picking up, the petrol price hike due next month. All these together increase the likelihood of a July hike,” Pienaar said.

Nomura’s parting shot was that the risk to a much more prolonged breach of target by the headline and core inflation, the skew of risk around the CPI more generally and some of the factors mentioned on wages and expectations – mean that a hawkish SARB will not use a delayed tariff increase as an ‘excuse’ for not hiking now.