ECONOMY
Rates unchanged despite threats
Posted Tue, 18 Apr 2006
The prime interest rate will remain unchanged at 10.5 percent after the SA Reserve Bank's Thursday decision not to change the seven percent repo rate, at which it lends money to commercial banks, despite the risk of a possible inflation increase.
"The MPC (Monetary Policy Committee) perceives the risks to inflation to be on the upside," Reserve Bank Governor Tito Mboweni said in Pretoria.
"In particular, the MPC is mindful of the threats posed by strong credit extension, consumer demand, the widening current account deficit and rising international oil prices.
"Nevertheless, given the benign inflation outlook at present, and having considered all the relevant factors, the committee has decided to keep the repo rate unchanged at seven per cent per annum."
Mboweni said growth in credit extension to the private sector reflected an increase in consumer expenditure. Over 12 months, growth in total loans and expenditure went up from 21.3 per cent in December 2005
to 22.2 per cent in February. In the same period, growth in asset-backed loans accelerated from 25.5 per cent to 27 per cent.
"The developments have... contributed to a further decline in gross national savings to 13 percent of GDP (Gross Domestic Product), and an increase in household indebtedness."
The ratio of household indebtedness to disposable income had risen to just below 66 percent in the last quarter of 2005, he said.
"The cost of servicing this debt, while still low, nevertheless increased from six and three quarters per cent of disposable income in the third quarter of 2005 to seven percent in the fourth quarter."
Mboweni said the current account of the balance of payments was an increasing source of concern for the MPC. The current account deficit as a percentage of GDP averaged 4.2 percent in 2005, increasing from 3.4 percent in 2004. In the final quarter of 2005, the deficit had risen to 4.5 percent of GDP.
"As noted in previous
statements, current account deficits are a reflection of higher domestic expenditure and are not in themselves inflationary.
"There is however, a possible risk to the exchange rate if the deficits are perceived to be unsustainable, particularly if the deficits are reflecting higher consumption expenditure."
International factors such as the fluctuating fuel price played a role in the risks threatening an increased interest rate and inflation outlook.
"In February the price of Brent crude fell to around $55 per barrel. This respite was short-lived, and as a result of renewed geopolitical tensions and tight demand and supply conditions, international oil prices have risen significantly," said Mboweni.
"Brent crude is currently trading at levels of almost $70 per barrel. The price of 93 octane petrol increased by 22 cents (South African rand) per litre in April, which more than offset the 11 cents per litre decline in March," Mboweni said.
Sapa
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