Reserve Bank governor Tito Mboweni kept interest rates unchanged on Thursday, despite higher food and oil prices posing a risk of higher inflation.

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, Mboweni said inflation was now expected to follow a moderately rising trend.

"According to the central forecast, CPIX inflation is expected to peak at around 4.9 percent in the first quarter of 2007 whereafter it is expected to decline slowly to reach around 4.7 percent at the end of the forecast period (calendar 2007)."

Oil and food price developments were potential inflation risks. "We will sit tight, grind our teeth and hope that these factors will work themselves out. If however these track down effect become generalised we as the MPC will react to that," Mboweni said.

At the time of the last MPC meeting in December the price of brent crude oil was around $55 per barrel, but since the beginning of 2006 international oil prices have risen again to levels of around $65 per barrel.

"These higher prices have already resulted in domestic petrol price increase of 14 cents per litre in February, which more than offset the six cents per litre decrease in January," Mboweni said.

Food price inflation was expected to be higher in 2006 than 2005.

"The higher food price inflation is evident in production prices. Along with higher maize prices (these) also point to a possible acceleration in retail food price inflation going forward," Mboweni said.

Robust domestic demand was also highlighted as a factor which could negatively affect the inflation outcome.

Household consumption expenditure remained strong, and new vehicle sales reached an all time high in December. They increased by 25.7 percent over the year as a whole.

The strong domestic demand was underpinned by the growth in credit extension, with total loans and advances in the private sector growing around 20 percent year-on-year during October and November, reaching 21.4 percent in December 2005.

There were a number of factors that were positive for low inflation. These included continued fiscal discipline, low world inflation, and well-anchored inflation expectations.

"Inflation expectations as indicated in the long term break-even inflation rates, measured as the yield differential between conventional bonds and inflation linked bonds, point to some improvement in inflation expectations since the last (MPC) meeting," Mboweni said.

He touched on the wage growth rate, which recorded a year-on-year increase of 7.9 percent in the third quarter of 2005, which was offset by positive productivity growth.

Mboweni said the current strong rand was in part a reflection of dollar depreciation and was supported by high commodity prices, further foreign direct investment inflows, positive South African economic data as well as a strong demand from foreigners for South African equities.

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