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Interest rates unchanged

May 24 2012 15:29 Sapa & Reuters

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Johannesburg - The Reserve Bank will maintain current interest rates, governor Gill Marcus said on Thursday.

It would leave the repo rate unchanged at 5.5% once again.

However, the bank would continue to closely monitor the situation and stood ready to act in either direction, she said.

The prime rate would stay at 9%.

This was the ninth consecutive meeting where the repo rate remained unchanged, after it was reduced by 650 basis points between mid-2008 and November 2010.

It keeps the rate at its lowest level in over 30 years.

The decision followed a meeting of the bank's monetary policy committee (MPC) in Pretoria.

Inflation

"The inflation forecast of the bank is lower over the near term than at the time of the previous meeting of the MPC.

"Inflation is seen to have peaked in the first quarter of 2012 at 6.1%, compared with the previous forecast where the peaking of 6.5 in the second quarter was anticipated.

"Inflation is expected to average 6% in the second quarter of 2012, and thereafter to follow a gradually declining trend within the target range.

"The forecast period has been extended to the end of 2014, and inflation is expected to average 6% in 2012, 5.5% in 2013, 5% in 2014, and 4.7% in the final quarter of that year."

"The improved near term forecast is due to lower-than-expected recent inflation outcomes, which lowered the starting point of the new forecast. The forecast for core inflation continues to show a moderate upward trend in the short to medium term.

"This measure is expected to peak at an average of 5.5% in the second quarter of 2013, marginally higher than in the previous forecast, before moderating and averaging 4.5% in the final quarter of 2014."

Domestic growth

"GDP growth at 2.9% for 2012 and 3.9% for 2013. Growth is expected to average 4.1% in 2014. The output gap of 3.5% is only expected to begin to contract during the course of 2013.

"However, the possible contagion effects from a further slow down in Europe will impact on domestic growth through the trade channel imparting a downside risk to this forecast.

"The bank's composite leading business cycle indicator has been increasing slowly consistent with the uncertain economic environment."

Rand

"The turbulence in the financial markets has caused the rand to depreciate but the associated risk to the inflation outlook is off set to some extent by the lower international oil prices and depends on how sustained the depreciation will be.

"The extent to which the rand depreciation feeds into the inflation outlook depends on the extent and duration of the moves. This in turn is likely to be highly dependent on the timing and nature of the developments in the eurozone and therefore a protracted period of exchange rate volatility is possible.

"In the absence of a speedy resolution to the crisis, the rand is likely to remain at current levels or even weaken further in the event of a disorderly unravelling of the eurozone crisis.

"Under such circumstances the unfavourable impact on inflation could be ameliorated to some extent by offsetting movements in international oil prices. However, the exchange rate has re-emerged as an upside risk to the inflation outlook."
gill marcus  |  reserve bank  |  interest rates
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