Sarb opts for caution on rates

Johannesburg - The South African Reserve Bank's (Sarb's) monetary policy committee (MPC) has left the key repo rate unchanged on Thursday at 6.5%, with the prime lending rate steady at 10%.

The repo rate is the rate at which the central bank lends to other banks, while the prime lending rate is the benchmark rate at which banks lend to customers.

The decision to leave rates unchanged had been expected, according to a survey of 11 leading economists polled by I-Net Bridge.

Against expectations, there was a cut in March, but the MPC kept rates on hold in May. It said at the time inflation forecasts indicated a slightly improved outlook compared with that presented at the previous meeting, with lower projected inflation for 2010 and 2011.

Efficient Financial Holdings [JSE:EFF] economist Freddie Mitchell said concern about inflation prospects probably swayed the MPC to keep rates unchanged.

"She (Sarb governor Gill Marcus) made a lot of comment around the weakness in the global economy, that the growth potential is low and that consumer demand remains weak within the local market,"said Mitchell. "Cost push pressures, especially higher wage increases, was the main reason behind them keeping rates on hold."

Nedbank Group economist Carmen Altenkirch [JSE:NED] concurred. "Today's interest rate decision was always going to be finely balanced," she said. "The very dovish tone of the statement suggests that one further cut in interest rates cannot be ruled out, particularly given significant downside risks to global growth and a benign inflation outlook."

Pan-African Capital Holdings economist Nomaza Zanazo said it seems the MPC chose to err on the side of caution, given that household consumption expenditure has improved.

"The latest retail and vehicle sales indicate that the consumer demand side of the economy is on the mend, with consumer inflation still well within the target range," Zanazo said.

 - Fin24.com & I-Net Bridge