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Rates remain unchanged at 5.5%

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Rates remain unchanged at 5.5%

by BuaNews
24 Mar 2011
BuaNews Online
BuaNews Online

The Reserve Bank's Monetary Policy Committee (MPC) has kept rates unchanged at 5.5 percent per annum in line with market expectation.


Reserve Bank Governor Gill Marcus on Thursday said since the previous meeting of the MPC in January, risks to the outlook for domestic inflation have increased on the upside, due mainly to cost push pressures.

The prognosis for domestic growth has improved with the recovery expected to be sustained. The Bank said household consumption expenditure has been the main driver of growth, while growth in fixed capital formation has remained weak.

"The MPC's decision was in line with our expectations. The general economic recovery is still largely hesitant and inflation remains under control, although pressures are rising. We expect the MPC to keep interest rates unchanged throughout the year before tightening in the first quarter of 2012, but the risk of a rate hike in late 2011 has increased," Nedbank economists said.

On Wednesday, Investment Solutions economist Chris Hart said the MPC would likely keep rates unchanged, its lowest in 30-years. "If the rand remains strong, there will be no need for a hike this year," said Hart.

The MPC said the global recovery seems to have remained on track, but that the European debt crisis, rising oil prices - which are partly a result of geo-political events in North Africa and the Middle East, and the tsunami and earthquake hit Japan - may moderate the pace of recovery in the near term.

"The MPC is of the view that the risks to the inflation outlook are on the upside. The MPC has decided to keep the repurchase rate unchanged at 5.5 percent per annum for the time being," said Marcus.

"The decision to hold rates steady was unanimous, given the huge uncertainties," she said, refusing to be drawn on whether there is a rate hike possibility later in the year.

"We will not speculate. We will look at the data and decide accordingly," she explained.

The central bank said that global inflation risks have also increased, particularly for emerging market economies.

Food price inflation, while still low, has been increasing. In February, it measured 3.5 percent and contributed 0.6 percentage points to the overall inflation outcome.

Petrol prices increased at a year-on-year rate of 12.3 per cent, while administered prices, excluding petrol, increased by 9.1 per cent.

The bank said the trajectory of the CPI forecast has changed since the last meeting, with inflation expected to remain within the target range over the whole forecast period.

Inflation is now expected to average 4.7 percent in 2011 and 5.7 percent in 2012. This is an upward adjustment of a half a percentage point for 2011/12.The upward adjustment is mainly due to revised assumptions regarding the international oil price over the forecast period.

Strong capital inflows to emerging markets last year have slowed down and in some instances reversed, with South Africa also experiencing net sales of bonds since November, and in the year to date, net sales of bonds and equities by non-residents amounting to R19.2 billion.

"Despite these net sales and the continued purchase of foreign exchange by the bank, the rand exchange rate has remained firm but volatile," said Marcus.
The governor said the bank was not targeting the exchange rate. "It is of concern to us, but we can't ignore the fact that it's a dollar story too."

The rand exchange rate is relatively unchanged since the previous meeting of the MPC, but has fluctuated between R6.80 and R7.33 per US dollar during this period.

Since the previous forecast, the bank expects Gross Domestic Product to average 3.7 and 3.9 percent in 2011 and 2012 respectively.

"These growth rates, while an improvement, are still too low to have a significant impact on the unemployment rate which measured 24,0 per cent in the fourth quarter of 2010," said Marcus.

Since December 2008, the repo rate has been cut by 650 basis points. - BuaNews

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