Johannesburg - Government bonds weakened and yields edged higher while the rand firmed slightly after the Reserve Bank kept its key repo rate on hold on Thursday, saying the outlook for inflation had deteriorated.
The yield on the 2015 bond rose to 6.66% from 6.63% just before Reserve Bank governor
Gill Marcus made the announcement. The rand firmed to R7.9150/$ from R7.9334/$ beforehand.
All 25 economists polled by Reuters last week saw the rate holding steady, but two saw a chance of a rate cut before the end of this year.
The bank slashed rates by a cumulative 650 basis points over a two-year period ending in November 2010, and most analysts expect the next adjustment in rates to be upwards.
Eurozone, Eskom
Marcus, however, warned that the forecast for growth in 2012 had been revised downward.
"The primary reason for the worsening domestic growth outlook is the risk of contagion from the persistent crisis in Europe, which shows no sign of a speedy resolution," she said.
"The outlook for domestic economic growth remains subdued."
The outlook for inflation had deteriorated, Marcus said, adding that administered prices remained a concern to the inflation outlook.
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.
Inflation would peak at 6.6% in the second quarter of this
year, only returning to the target range in the first quarter of 2013, it added.
The price of electricity has been an important driver of inflation, and increases of 17.3% are assumed for both 2012 and 2013, she said.
"However, the current Nersa (National Energy Regulator of South Africa) determination ends in mid-2013 and subsequent price increases are yet to be determined.
"The case for further significant above-inflation increases is questionable. The determination of administered prices should not act as an inhibitor to growth and investment," she said.
The rand continued to be "volatile" in "response to erratic changes in global risk aversion" and its outlook was still dependant on global risk appetite.
Marcus again warned that the global economic outlook was clouded by the eurozone crisis.
"It is now generally accepted that the eurozone is likely to experience a recession in 2012, but the extent and duration is still uncertain," she said.
Analysts were unsurprised by the decision.
Mandla Maleka, Treasury economist at Eskom, said it was expected.
"Clearly the Reserve Bank is now
considering other pressing concerns in the economy, in particular growth
prospects," he said.
“Even though inflation was out of target and may remain above
target, they are taking into consideration the fact that global growth prospects
remained mired on the weak side which means our exports may be hampered, in
which case growth prospects will be weak.
"If conditions continue, the MPC may debate the issue of a cut if
the country does not come out of the weak domestic demand.”
Nedbank chief economist Dennis Dykes said there appeared to be a bit of a "hawkish undertone" to Marcus' statement.
"Obviously, the Reserve Bank is a little bit
uncomfortable with the inflation being above the target zone. I think on balance it was the right sort of decision."