Economy

Rates unchanged amid slower growth

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20 January 2012

In line with expectations, the South African Reserve Bank decided to keep its key repo rate unchanged at 5.5% at the first meeting of its monetary policy committee (MPC) this year.

The repurchase (repo) rate is the rate at which the Reserve Bank lends money to the country's commercial banks, which in turn lend money to corporate and individual consumers at a higher rate - the repo rate plus 3.5% - known as the prime interest rate.

"The monetary policy committee has decided to keep the repurchase rate unchanged at 5.5% per annum," Reserve Bank Governor Gill Marcus said at the end of the MPC meeting in Pretoria on Thursday.

South Africa's central bank said the main downside risk continued to come from global economic developments.

Analyst David Shapiro earlier on Friday that he had expected the repo rate to remain unchanged. "It is a matter of holding down," he noted, adding that although South Africa's economy was starting to show signs of recovery, there were a lot of disruptions last year, including industrial action.

In December, the Consumer Price Index (CPI) remained at 6.1% for the second month in a row breaching the central bank's target range of between 3% and 6%. Food prices, fuel as well as administered prices played a role in December's figure.

Inflation to peak at 6.6%

The Reserve Bank added that it now expected inflation to remain above the upper end of the target range for a "more extended period".

Inflation is now expected to remain outside the upper end of the target range for the whole of 2012, and to peak in the second quarter of 2012 at around 6.6% before declining gradually and returning to within the target range in the first quarter of 2013.

Inflation is expected to measure 5.5% in the final quarter of 2013. The Bank's forecast of core inflation, which excludes food, petrol and electricity, shows a moderately rising trend, with the peak of around 5.5% expected in the first two quarters of 2013.

According to the Bank, the outlook for domestic inflation and economic growth has deteriorated since the previous MPC meeting, posing a serious challenge for monetary policy going forward.

The primary reason for the worsening domestic growth outlook is the risk of contagion from the persistent crisis in Europe, which shows no sign of a speedy resolution, the bank added.

"The MPC remains of the view that inflation pressures are primarily of a cost-push nature, but it is concerned that a persistent upward trend in inflation and prolonged breach of the inflation target could have an adverse effect on inflation expectations which could reinforce the upward inflation dynamics.

"The MPC is also cognisant of the slowing domestic economy and feels that given the lack of demand pressures, monetary tightening at this stage would not be appropriate," said Marcus.

She added that the global outlook remained clouded by the worsening conditions in the Eurozone. "It is now generally accepted that the Eurozone is likely to experience a recession in 2012, but the extent and duration is still uncertain."

Growth outlook remains subdued

According to the Bank's forecast, the annual real growth rate in 2011 is estimated to have been in the region of 3.1%, but the outlook for 2012 and 2013 has deteriorated relative to the previous forecast, mainly due to a downward revision to the global growth assumption.

Growth in 2012 is expected to average 2.8% compared with 3.2% in the previous forecast, while the forecast for growth in 2013 has been revised down from 4.2% to 3.8%.

"The MPC maintains a preference for a stable interest rate environment given the conflicting pressures on monetary policy at this stage.

"However, the committee will continue to monitor domestic and global economic and financial developments and the risks to the outlook, and remains ready to act appropriately to ensure the attainment of the inflation target over the medium term while being supportive of the domestic economy," said Marcus.

The last time the Reserve Bank cut the repo rate was in November 2010 - cutting it to its lowest in a period of 30 years.

SAinfo reporter and BuaNews