MPC keeps repo rate unchanged

Thursday, October 22, 2009

Pretoria - South Africa's repo rate has been left unchanged at 7 percent, outgoing Reserve Bank Governor Tito Mboweni announced on Thursday.

"The Monetary Policy Committee (MPC) is of the view that overall the risks to the inflation outlook have not changed markedly since the previous meeting. Accordingly the MPC has decided to leave the repurchase rate unchanged at 7 percent per annum," said the outgoing governor, who has served the MPC for 11-years.

He will be replaced by former deputy governor Gill Marcus on 9 November.

At the last MPC meeting, the bank also decided to keep the repo rate unchanged.

Mboweni said the prospects for inflation returning to within the inflation target range of between 3 and 6 percent by the second quarter of 2010 remained promising, however, adding that domestic demand conditions continue to be subdued. These, he said, do not pose a significant threat to the inflation outlook.

The central bank said growth prospects domestically were expected to improve in the coming months but that they were dependent on the global economic recovery that seems to be uneven.

However, the medium-term inflation outlook has been affected adversely by possible further significant adjustments to electricity tariffs. Power utility Eskom has requested the National Energy Regulator for a 45 percent electricity tariff hike.

"The substantial electricity tariff increases requested by Eskom are seen to be the main longer-term threat to the inflation outlook," said the governor.

Regarding the looming decision on the tariff application, the governor said: "no doubt that the required increases will have a significant impact on the inflation outcome. We are sympathetic to Eskom's fund expansion. Yes we are concerned but there's not much we can do, we cannot condemn Eskom," said Mboweni.

The risks to the inflation outlook emanated from cost pressures in the economy with the trend of wage settlements still posing an upside risk to the inflation outlook. "However there appears to be some evidence that nominal wage increases are moderating, although increases have generally been above the inflation rate."

However, the MPC said there were positive signs that the rate of contraction in the domestic economy had declined and that the economy may emerge from the recession by the end of this year though this may be tentative.

Commenting on his exit, Mboweni said: "I feel good in many ways that I am going to be a pensioner soon, I don't have to worry about a lot of things. Its time to move on to retirement."

The decision to keep the repo rate unchanged comes as no surprise as market consensus was that the bank would leave the rate unchanged.

"There was no surprise there. Inflation is still a problem; there are concerns about electricity and food prices that can push inflation unacceptably high," said Standard Bank senior economist Dr Johan Botha.