Rates remain unchanged at 5.5%

Thursday, September 22, 2011

Pretoria - The Reserve Bank's Monetary Policy Committee (MPC) has left rates unchanged at 5.5%, Governor Gill Marcus said on Thursday.

"The MPC has decided to keep the repurchase rate unchanged at 5.5 percent per annum, for the time being. The MPC is however concerned at the potential impact of the current global turmoil on domestic economic prospects and stands ready to act appropriately should the need arise," said Marcus on Thursday.

Since the MPC's last meeting in July, downside risks to both the global land domestic growth prospects have increased which was also caused by the European sovereign debt crisis with heightened risk aversion resulting in increased volatility of capital flows globally impacting on foreign exchange markets.

The MPC decision follows on data on CPI figures released on Wednesday showing that consumer inflation remained unchanged at 5.3% in August. The inflation forecast of the central bank is that inflation will breach the upper end of the target range in the last quarter of 2011 peaking in 2012.

Standard Bank senior economist Dr Johan Botha said the decision did not come as a surprise to the market given that the local economy and global economy is not performing too well.

Marcus said the issue of whether the interest rate should be cut did come up as it would be inappropriate not to discuss it. However, it was a unanimous decision to keep rates unchanged. She did however say that one member of the seven-member committee wanted the repo rate cut.

"I'm not too sure whether a cut would stimulate the economy seeing that the rate is at its lowest in 30-years, perhaps it would help people in debt and households," explained Botha.

The Bank's forecast of core inflation, which excludes food, petrol and electricity, shows a moderately rising trend, peaking at around 5.1% in the second and third quarters of 2013.

The MPC said domestic economic recovery was fragile and uneven with growth performance in advanced economies remaining weak. "There is a general expectation of even weaker outcomes in the near-term, although it is still unclear if the stalled state that many economies find themselves in will translate into a recession," she said. 

Emerging markets are expected to have faster growth but will be vulnerable to contagion effects from a slowdown or recession in developed nations. "In line with the current two-speed global economy, inflation trends are higher in the emerging economies, driven mainly by food and energy prices," she said.

On the weakening of the rand - which fell to R8.3264 to the dollar on Thursday - its weakest since July 2009 following news of instability in the US - the MPC said its depreciation posed a potential upside risk to the inflation outlook. 

"The degree of this risk will depend on the extent and persistence of the depreciation trend, which in turn will be influenced by the duration and intensity of global risk aversion. The rand tends to be more sensitive to changes in global risk perceptions than most of its emerging market peers. At this stage the MPC still considers the upside risk to the inflation outlook from this source to be relatively moderate, but rising."

Since the beginning of the year the rand has depreciated by 18.6%.
"What we are experiencing is not unique to South Africa .... This is a result of risk aversion, we must bear in mind that figures change all the time," she explained. The depreciation of the rand against the dollar is expected to contribute to an increase in the petrol price in October.

The central bank noted the "disappointing" domestic growth with GDP growing by 1.3% in the second quarter with industrial action expected to have an impact on third quarter GDP.

Additionally the bank has lowered its forecast for average growth in 2011 to 3.2 % down from 3.7%. The forecast for 2012 has been reduced from 3.9% to 3.6% and that of 2013 is unchanged at 4.4%. The downgrading of the forecast is due to lower than expected outcome in the second quarter as a downward adjustment in the global growth assumption.

This she said did not bode well for job creation. On wage settlements, these had moderated but well above the inflation rate. Administered prices remains the key upside risk to inflation with the MPC being of the view that the underlying inflation.

Botha said the lowering of the GDP forecast is of concern. "This will have an impact on economic growth and employment," he said. - BuaNews

Most Read

SA News on Facebook