Bank holds rates steady with an eye on inflation

Reserve Bank dwells more on the risks to the inflation outlook than the threat slower global growth posed to SA’s economy.

THE Reserve Bank kept interest rates steady yesterday, dwelling more on the risks to the inflation outlook than the threat slower global growth posed to SA’s economy.

Its decision to keep the repo rate steady at 5,5% was widely expected, but the tone of the Bank’s announcement prompted markets to price in a lesser chance that rates will fall in the months ahead.

Some economists had believed there was a possibility another rate cut was on the cards. It now appears that this is unlikely unless Europe’s sovereign debt crisis worsens to the extent that the global and domestic economies are severely hit.

There were lots of reasons to consider a rate cut and the topic was actively discussed by the monetary policy committee (MPC) during its deliberations this week, Bank governor Gill Marcus said.

"On balance, we felt it was appropriate to hold ... (and) the decision was unanimous," she said.

The MPC statement said the outlook for inflation had deteriorated, although SA’s "hesitant" economic recovery meant there were no demand-led price pressures. Inflation was now expected to breach the upper end of its official 3% to 6% target for longer then expected next year, peaking at 6,3% in the first quarter and falling back inside the range in the final quarter.

The MPC "assesses the risks to the inflation outlook to be on the upside, mainly due to cost push pressures", the Bank’s statement said. This was a reference mainly to the effect of higher domestic electricity, food and fuel prices.

At its meeting in September, the MPC said the risks to the inflation outlook were "delicately balanced".

It highlighted the rand’s volatile exchange rate as another inflation risk yesterday, but also said the currency was likely to moderately appreciate next year — depending on global developments.

The rand has weakened by nearly 19% against a trade-weighted basket of currencies this year, in a trend that fans inflation by raising the cost of imports. But it has appreciated slightly since the last MPC meeting in September.

"Unless the rand continues on a depreciating trend, the impact is likely to be relatively limited and should dissipate in the short to medium term," the MPC said.

The Bank also revised down its growth forecasts for the economy, predicting it would expand 3% this year and 3,2% next year. That compares with estimates of 3,2% and 3,6%, respectively, in September.

"The prospects for further employment are uncertain, given the slowing growth of the domestic economy and the fragile global economic environment," it said.

SA’s jobless rate declined in the third quarter of this year, but is still alarmingly high at more than 25%.

Growth in consumer spending — the economy’s main engine — was likely to have remained "relatively subdued" in the third quarter of this year, the Bank said.

The MPC indicated that a rate cut was not totally out of the question as it was "ready to act appropriately should the need arise", referring to the dangers of a disorderly resolution of Europe’s crisis.

"Overall, the Reserve Bank is clearly trying to balance the competing demands of managing the inflation outlook, while at the same time doing enough to stimulate the economy," Stanlib economist Kevin Lings said.