Reserve Bank keeps repo rate unchanged

Thursday, May 12, 2011

Pretoria - The Reserve Bank's Monetary Policy Committee on Thursday kept interest rates as is at 5.5 percent.

"The MPC has decided to keep the repurchase rate unchanged at 5.5 percent per annum, for the time being," Governor Gill Marcus said following the MPC's two-day meeting this year. Analysts had expected the repo rate to remain unchanged.

Marcus said that since the last meeting the inflation outlook has deteriorated further mainly due to external cost-push factors. The economic recovery domestically she said had been sustained though at moderate levels with no signs of increase in employment. The bank said the international outlook remains uncertain with the economic recovery becoming hesitant in the wake of Japan's earthquake and commodity prices among other things.

There has also been a further upward revision to the CPI forecast of the bank with inflation now expected to reach the upper limit of the inflation target range during the final quarter of 2011, and to peak at 6.3 percent in the first quarter of 2012. It will return to within the target range by the second quarter of 2012 and remaining close to the upper limit of the range for the rest of that year.

"Inflation is expected to average 5.1 percent in 2011 and 6.0 percent in 2012, compared with averages of 4.7 percent and 5.7 percent forecast at the time of the previous meeting," she said, adding that the upward adjustment is mainly due to revised assumptions regarding administered price increases over the forecast period.

The bank also noted that the relatively strong rand exchange rate persisted despite continued purchases of foreign exchange by the Bank. Factors affecting this included strong commodity prices, the narrow current account deficit and resumption of portfolio flows to South Africa.

The bank said domestic economic growth is lower than that of other emerging market peers. "The Bank's forecast for economic growth is 3.6 percent (previously 3.7 percent) and 3.9 percent for 2011 and 2012 respectively."

The bank said it is of the view that underlying inflation pressures are mainly of a cost push nature resulting in an expected temporary breach of the upper limit of the inflation target band during the first quarter of 2012. The inflation rate is between three and six percent. "It is recognised that these pressures have the real potential to generate second round effects which can result in more generalised inflation," she said.

Analysts had predicted that the repo rate would remain unchanged when the MPC met at its third official meeting. This is the third time this year that the central bank has opted to keep rates unchanged.

Standard Bank senior economist Dr Johan Botha said earlier this week: "I don't think the MPC will change its view also given the exchange rate which is volatile and strong. The outcome would be that the central bank will watch developments closely," explained Botha.

The decision to keep rates unchanged had been a unanimous one. "We did not see it appropriate to raise rates," said Marcus.

On the question of wage settlements Marcus said: "What we've pointed out is that wage settlements are above inflation."

In November, the Reserve Bank slashed the repo rate by 50 basis points reducing it to its lowest in 30 years. Since December 2008, the repo rate has been cut by 650 basis points.

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