Fin24

Petrol, food prices main inflation risks

2012-09-20 16:01

Pretoria - The South African Reserve Bank (Sarb) left its repo rate unchanged as expected at 5% on Thursday, saying it had already preemptively cut rates at its previous meeting.

Twenty-five of the 28 economists polled by Reuters had forecast that the Bank’s Monetary Policy Committee would keep the repo rate - at which it lends to commercial banks  - unchanged after a surprise 50 basis point cut in July.

Sarb governor Gill Marcus listed the reasons for the Monetary Policy Committee’s interest rate decision:

Inflation

“Despite the number of upside, supply-side risks, inflation is expected to remain contained within the target range over the forecast period.

“Global inflation remains relatively benign given the weak demand. But supply side shocks in the form of higher food prices ... and resilient international crude oil prices pose a risk to the outlook.

“The inflation forecast of the bank reflects a moderate deterioration for 2013 compared with the previous forecast, and a relatively flat trajectory over the entire forecast period.

“Inflation is now expected to average 5.3% in the final quarter of 2012, 5.2% in 2013 and 5.0% in 2014.

“Food and petrol prices are the main upside risks to the inflation outlook.

“The near-term deterioration is mainly due to higher than expected petrol and food inflation. Core inflation appears to be well contained with a peak of 4.9% expected in the final quarter of 2012, compared with the previous forecast peak of 5.4%.

“The committee assesses the risks to the inflation forecast to be more or less balanced.

“The trends in wage growth has been relatively benign from an inflation perspective ... However, there’s a risk that the recent wage settlements in the mining sector could set a precedent for wage demands more generally.” 

Domestic growth

“Real GDP growth is now expected to average 2.6% in 2012 and 3.4% in 2013, compared with 2.7% and 3.8% in the previous forecasts.

“The MPC remains concerned about the risks posed to the domestic economy from the global environment.

“Despite renewed stimulus in the United States, growth is expected to remain subdued at least until the ’fiscal cliff’ issue is resolved.

“Notwithstanding these downward revisions, the Bank sees further risks to the downside.

“The domestic outlook is also likely to be constrained by local developments, particularly in the mining sector, which have the potential to undermine the already fragile private sector investment sentiment despite the accommodative macroeconomic policy environment.”

Rand

“The exchange rate poses a potential risk to the inflation outlook, particularly in the event of an unsustainable widening of the deficit in the current account of the balance of payments.

“To date the rand has remained relatively resilient.”

On questions posed by the media, Marcus said:

“This accommodative stance is assessed to be consistent with the Bank’s price stability mandate, and conducive to encouraging growth and domestic investment.”

“At its previous meeting, the MPC assessed that conditions justified a pre-emptive loosening of the monetary policy stance. Although global and domestic growth conditions remain challenging, the MPC is of the view that a further reduction in the repurchase rate is not appropriate at this stage.”

“(Mine strikes are) a big challenge as the number indicates in terms of growth at this point in time, the first quarter to the second quarter numbers from the mining sector have been very volatile. ” 

The rand weakened slightly against the dollar after the Sarb's forecast that inflation would average 5.3% in the fourth quarter.

The rand weakened to R8.3639/$ at 15:04, compared with R8.359 earlier in the trading session.  

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Comments
  • paul.s.desousa - 2012-09-20 17:40

    The fundamental problem here is a failure to define the problem properly. For example, the definition of human action is not that people are engaged in all sorts of activities, but that they are engaged in purposeful activities--purpose gives rise to an action. Similarly, the essence of inflation is not a general rise in prices but an increase in the supply of money, which in turns sets in motion a general increase in the prices of goods and services. Inflation is a general increase in the money supply. They are a major cause of the problem by printing money and anti-economic freedom policies. In 10 years we have dropped from 44 to 85 in the world in terms of economic freedoms according to the think tank FMF (Foundation for economic Freedom).

  • TshilidziPhuravhathu - 2012-09-20 18:23

    You might want to add e-tolls to that list...

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