Repo rate unchanged despite inflation rise

The rand rose yesterday as the Reserve Bank decided to hold rates steady, but South Africans can expect to buy less for their money after inflation breached the ceiling of the target. Photo: AP

The rand rose yesterday as the Reserve Bank decided to hold rates steady, but South Africans can expect to buy less for their money after inflation breached the ceiling of the target. Photo: AP

Published May 23, 2014

Share

Johannesburg - Borrowers can breathe a sigh of relief after the monetary policy committee (MPC) of the Reserve Bank decided yesterday to keep interest rates unchanged at 5.5 percent, as the market had expected.

Five members of the committee wanted to keep interest rates steady, while two others wanted a hike, central bank governor Gill Marcus said. She said the MPC continued to face the dilemma of dealing with upside risks to inflation amid sluggish economic growth.

Although last month’s breach of the 6 percent ceiling of the bank’s inflation target band was in line with its forecast, the risks remained on the upside.

“The policy dilemma is increased by the fact that inflation is seen to be driven primarily by supply side factors, while demand in the economy is subdued.”

Marcus said the forecast for headline inflation had changed marginally since the MPC’s March meeting. Inflation was expected to average 6.2 percent this year against 6.3 percent previously, with the peak of 6.5 percent (previously 6.6 percent) likely in the fourth quarter.

The forecast horizon had been extended and inflation was expected to average 5.5 percent in 2016, and 5.4 percent in the final quarter of that year. It was still expected to remain outside the target band from the current quarter until the second quarter of next year.

Marcus said the outlook for core inflation was also largely unchanged. This measure was expected to average 5.7 percent this year and next and 5.6 percent in 2016.

She said the MPC continued to hold the view that it was in a rising interest rate cycle, and interest rates would have to be normalised in due course.

The bank’s economic growth outlook for this year had been revised down significantly to 2.1 percent from 2.6 percent and first-quarter growth was anticipated to be the lowest quarterly rate since the 2009 recession.

She said despite a more favourable global growth environment, the domestic growth picture had deteriorated markedly, with the reversal of a number of the tentative positive signs observed at the beginning of the year.

“There is still no end in sight to the protracted strike in the platinum sector, and the economic and social costs are escalating and are potentially devastating. Both the mining and manufacturing sectors contracted in the first quarter, with electricity supply constraints adding to the weak outlook. Against this backdrop, monetary policy faces an increasingly challenging scenario.”

Marcus said while the recent exchange rate developments had afforded some near-term respite from further inflation risks from the weak rand, the MPC was mindful of the sensitivity of the rand to global and domestic factors.

George Herman, a portfolio manager at Citadel, said the MPC’s belief that inflation would normalise soon showed it would not hesitate to hike rates should the outlook deteriorate.

The rand firmed nearly 7c against the dollar yesterday, to be bid at R10.3458 at 5pm. - Business Report

Related Topics: