ECONOMY
SARB keeps rates unchanged
Posted Fri, 09 Dec 2005
Threats posed to inflation by volatile oil prices and high domestic expenditure prompted the SA Reserve Bank (SARB) on Thursday to keep interest rates unchanged.
While consumer inflation has remained under control and within the target range of three to six percent, a number of "significant risks" remained, SARB governor Tito Mboweni said in Pretoria.
Announcing the decision of the Monetary Policy Committee (MPC) not to alter the seven percent repo rate at which the central bank lends money to commercial banks, he said inflation outlooks had improved since October.
The economy was growing at a faster rate than expected (4.5 percent for last year), and declines had been recorded in consumer inflation despite petrol price hikes.
CPIX inflation (consumer inflation minus mortgage costs) declined to 4.7 percent in September and 4.4 percent in October from a peak of 4.8 percent in August.
There was a continued absence of marked second-round
inflationary effects from petrol price increases.
Year-on-year declines were recorded in the prices of clothing and footwear, furniture, equipment and homeowners' costs, while food price inflation also remained low, Mboweni said.
Inflation on services, administered and producer prices also declined.
Wage growth had remained moderate and unit labour cost increases were well within the target range.
The budget deficit for the current financial year was expected to be about one percent of Gross Domestic Product, compared to an initial estimate of 3.1 percent. Projected deficits for the next two fiscal years were about two percent of GDP.
The governor said the forecast for CPIX, which the central bank aims to keep within the target range, was now expected to reach a lower level of about five percent by the end of 2007.
World growth should remain "relatively vigorous" and world inflation was expected to moderate next year to an average
rate below four percent.
On international oil prices, Mboweni said these had moderated somewhat and were lower than they have been for some time.
A resultant 61 cent drop in petrol prices for November and December had yet to be reflected on CPIX figures for those months, with a further reduction likely for January.
"However, given the risks and volatility in the oil markets, including uncertainties related to the Northern Hemisphere winter, this situation could change very rapidly and will therefore need to be closely monitored."
Output and expenditure trends were likely to be a source of pressure on inflation, Mboweni said.
"Although growth is expected to continue at a robust pace, there are also some indications of a slowdown in manufacturing sector growth."
Real gross domestic demand grew at about six percent in the first three quarters of the year and household expenditure rose at a similar rate.
Motor vehicle sales
continued to reach new highs and house prices were still rising.
This had resulted in household debt as a percentage of disposable income rising to 63.5 percent in the third quarter, Mboweni said.
Money supply and credit extension growth remained at high rates, and mortgage advances remained strong. The governor pointed to an increasing deficit on the current account of the balance of payments as a potential source of concern.
The deficit rose to 4.7 percent of GDP in the third quarter, up from a revised 3.7 percent in the second.
"These deficits are a reflection of higher domestic expenditure and are not in themselves inflationary," the governor said.
To date, the deficit has been adequately financed by capital inflows, attracted by the South African economy's improved growth prospects.
Mboweni said the MPC would remain vigilant in its inflation targeting.
"Should the outlook deteriorate, the MPC will not hesitate to
adjust the repo rate in the appropriate direction."
In doing that, the MPC would take into account the country's overall economic performance — including factors like a contracting manufacturing sector, the governor added.
But for now, the prime interest rate was to remain at 10.5 percent.
Sapa
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