Mixed reaction to interest rate

Johannesburg - The announcement that the repo rate would remain unchanged at 5% evoked mixed reaction on Thursday.

Investec group economist Annabel Bishop said the decision cited upside risk to inflation given the potential for the rand to depreciate further.

"The monetary policy committee's tone remains slightly hawkish as it focuses on the need to contain inflation expectations," she said.

"We continue to believe interest rates will remain unchanged this year and next, with the risk that economic growth comes out weaker than forecast, and so demand led inflation pressures moderate further."

SA Reserve Bank (Sarb) governor Gill Marcus said the inflation forecast remains uncomfortably close to the upper level of the inflation target range.

"Given the increased upside risks to the outlook, we do not see room for further monetary accommodation."

The Sarb lends money at the repo rate to commercial banks, which means the prime interest rate will also remain steady at 8.5%.

Bishop said as economic growth deteriorated further, the MPC's tone may become more "dovish" as the consumer price index (CPI) subsided.

"We continue to believe that a 25 basis point cut in the repo rate would bolster consumer and business sentiment and foreign purchase of SA equities, and so strengthen the rand."

FNB property strategist John Loos said the unchanged repo rate would have positive and negative implications for households and consumers.

"The currently low interest rate levels, while possibly not contributing noticeably to further deterioration in some big household sector 'financial frailties', also don't appear to be having any significant impact in improving them," he said.

"Two of these key indicators of financial weakness are the household sector debt-to-disposable income ratio, and the household sector savings ratio."

The Independent Municipal and Allied Trade Union (Imatu) welcomed the unchanged repo rate, but said a rate cut would have been preferable.

"Our members have faced steep increases in administered prices such as petrol, water, public transport and electricity and our Gauteng members found out yesterday that e-toll tariffs will begin on December 3 2013.

"Increased interest rates would put excessive and unaffordable pressure on workers," Imatu general secretary Johan Koen said in a statement.

FNB chief economist Sizwe Nxedlana said the Sarb's decision was not surprising given the difficult trade-off it faced.

He encouraged consumers to use the current low interest rate environment to pay off debt before rates began to rise again.