Johannesburg - The South African Reserve Bank left its repo rate unchanged at 5.5% on Thursday as expected, with concerns about a slowing economy offsetting the pressures from inflation, which is likely to stay outside its target band for longer than previously expected.
At its first policy meeting of 2012 the bank raised its inflation forecast, saying it expected inflation to be outside its 3% to 6% target range throughout 2012, with the recent depreciation of the rand the main reason.
Government bonds weakened after that, with investors worried inflation would eat into their returns. Governor Gill Marcus
said the bank did not discuss reducing interest rates, a hint that monetary loosening might be off the table.
“It seemed as though there was a little bit more of a hawkish undertone to the message. Obviously, the Reserve Bank is a little bit uncomfortable with the inflation being above the target zone,” said Dennis Dykes
, chief economist at Nedbank.
The Reserve Bank said inflation would peak at 6.6% in the second quarter of this year, adding it would only return to the target range in the first quarter of 2013.
Previously, the monetary policy commitee (MPC) saw inflation peaking at 6.3% in the first quarter and returning to the target late this year.
Inflation was being driven mainly by cost-push pressures such as food, fuel and administered prices. Marcus said raising interest rates “at this stage would not be appropriate” given the lack of demand pressures. Next move?
The Reserve Bank has left interest rates at 30-year lows since last year, after reducing them by a cumulative 650 basis points in the two years to November 2010.
The consensus is that the next move in rates is going to be upwards, but with growth being sluggish the question is when the central bank can do so without harming it.
The rand briefly firmed after the MPC’s decision but later retreated. Rates on the money market were fairly steady, after dipping slightly.
“I would describe this as a fairly neutral speech with big risks for growth and inflation. But we don’t expect a rate movement anytime soon especially if the rand continues to recover,” said George Glynos, managing director at ETM.
South Africa lost more than a million jobs during the recession and Marcus said labour market prospects “remain uncertain”.
With such concerns, the bank will likely delay rate increases until the economic outlook has improved.
Local data suggest consumers are still hesitant to spend freely, while the key manufacturing and mining sectors remain sluggish.
On that, the bank cut its 2012 growth forecast to 2.8% from 3.2%, a fraction of the 7% the government has said is needed to create jobs.
Marcus said the MPC maintained a preference for a stable interest rate environment but was “ready to act appropriately to ensure the attainment of the inflation target over the medium term while being supportive of the domestic economy”.