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Why interest rates are staying at 5%

Mar 20 2013 12:46 Reuters
Sarb governor Gill Marcus. (AFP)

Sarb governor Gill Marcus. (AFP)

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Johannesburg - South African Reserve Bank Governor Gill Marcus on Wednesday announced that the repo rate will remain at 5%, citing several risks to inflation and growth.

The repo rate is the interest rate at which the Sarb lends money to commercial banks.

The prime lending rate for consumers stays at 8.5%.

The factors influencing the decision as cited by Marcus were:
  
Inflation

"Inflation is now expected to average 5.9% in 2013 and 5.3% in 2014, compared with the previous forecasts of 5.8% and 5.2% for these respective years.

"Inflation is expected to breach temporarily the upper end of the target range in the third quarter of 2013, when it is expected to average 6.3%, and then to moderate gradually to 5.2% in the final quarter of 2014.

"This deterioration is largely due to the depreciation of the rand and higher petrol prices, which more than offset the impact of the lower electricity price increases and a lower starting point.

"The exchange rate of the rand continues to pose the main risk to the inflation outlook.

"There are indications that the pressures on inflation emanating from food prices may be moderating.

"The MPC continues to assess the balance of risks to the inflation outlook to be on the upside, mainly due to the exchange rate and wage pressures."

Growth

"The moderate pace of recovery is expected to continue in 2013. The bank's forecast is for growth of 2.7% this year, marginally up from the previous forecast of 2.6% and 3.7% in 2014, compared with a previous forecast of 3.8%. The risks to these forecasts are assessed to be on the downside.

"Domestic growth prospects remain relatively subdued notwithstanding a better-than-expected fourth quarter GDP growth outcome and positive developments in the mining and manufacturing sectors in January.

"The economic growth outlook is more or less unchanged from the previous meeting of the MPC, and risks to the outlook remain on the downside. The unresolved labour disputes in the mining sector pose a significant risk to the exchange rate and to economic growth through their negative impact on export revenues, employment growth and investor perceptions of South Africa."

Rand

"The rand is likely to remain sensitive to both domestic and global developments.

"The exchange rate is expected to remain volatile and subject to overshooting, and further sustained depreciation would increase the upside risk to the inflation outlook."

Wage settlements

"The trend in wage settlements remains an upside risk to the inflation outlook, although recent data is somewhat contradictory.

"The MPC remains concerned about the possible impact of excessively high wage increases on employment growth."

On decision

"The MPC continues to assess the monetary policy stance to be appropriately accommodative given the persistence of the negative output gap.

"At the same time, further accommodation remains constrained by the upside risks to the inflation outlook.

"The MPC has therefore decided to keep the repurchase rate unchanged at 5.0% per annum. The Committee will continue to apply monetary policy consistent with its mandate of price stability within a flexible inflation targeting framework." 

The rand was a touch firmer after the decision on rates, trading at R9.2170/$ by 12:33 from R9.2280 beforehand.

The yield on the 2026 bond edged up to 7.485% from 7.47% while that for the 2015 bond was slightly lower at 5.475%.

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sarb  |  gill marcus  |  rand  |  interest rates  |  inflation
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