Share

Dovish Sarb seen leaving rates on hold

Pretoria - The Reserve Bank left its repo rate unchanged as expected on Thursday, saying a forecast that inflation would now breach its upper target level by year-end was balanced by risks to fragile economic growth.

The dovish tone of Governor Gill Marcus’s statement, which suggested monetary policy could remain accommodative this year, led government bonds to extend gains, pushing yields to their lowest levels in about two weeks.
 
The Bank’s monetary policy committee (MPC) has now left rates on hold at its last four policy meetings after a two-year loosening cycle that ended in November 2010 and saw 650 basis points lopped off the repo rate, taking it to an historic low of 5.5%.
 
“The view of the MPC continues to be that the underlying inflation pressures are mainly of a cost push nature, notwithstanding signs of a possible moderate increase in underlying inflation,” Marcus told a news conference.
 
“Despite the upside risks posed by cost push factors, the MPC sees a number of downside risks to the inflation outlook, with the risks being seen to be delicately balanced,” Marcus said.
 
“These risks include the continued fragile nature of the domestic recovery, as well as risks posed by the ramifications of a possible disorderly debt default in the eurozone.”
 
The Bank’s inflation forecast had shown a slight near-term deterioration since the previous meeting in May, and was now seen breaching the upper end of the 3% to 6% target band in the final quarter of 2011, to an average 6.3% in the first quarter of 2012.
 
The Bank had predicted inflation would break through the top end of the band in the first quarter of next year.
Marcus said recent wage settlements appeared to have reversed a previous moderating trend and could represent a significant upside risk to the inflation outlook.
 
Workers in industries such as mining and petroleum have held strikes to press for wage increases averaging more than double the inflation rate.
 
Food and oil prices remained the major risks to the inflation outlook, however.
All 21 economists polled by Reuters last week saw the rate holding steady, although 12 of these expected an increase before the end of the year.

Market sees Marcus tone as dovish
 
With a “hold” decision almost a certainty, the market was looking for clues as to when the Bank will start monetary tightening, given the delicate balance needed to keep inflation in check without adding further strain to growth.
 
“I think they’ve got a good handle on the current inflationary environment. What stood out for me is the way they highlighted growth,” said George Glynos, managing director at ETM.
 
“For all those people that were thinking rates may rise before the end of this year, they might have to re-think those calls and perhaps push the rates rise further out.”
 
Government bond yields fell to their lowest levels in about two weeks after Marcus’s announcement, with the 2015 note initially going to 7.35% from 7.37%, while the yield on the longer-dated 2026 note fell to 8.45% from 8.505%.
 
The rand firmed to R6.7982/$ from R6.8103/$ before the announcement.

Marcus said the domestic economic recovery had continued but in a hesitant manner.

The strong performance of the economy in the first quarter of the year was unlikely to be repeated in the second quarter and growth prospects would be dependent on global developments.
 
The latest data from Statistics South Africa showed growth in manufacturing production, which accounts for about 15% of GDP, remained depressed at 0.6% year-on-year in May.

Growth in retail sales was flat over the same period, a sign that consumer demand remains muted after a recession in 2009 that slashed about one million jobs.
 
The forecast of the Bank for GDP growth in 2011 and 2012 remained unchanged at 3.7% and 3.9% respectively, while growth in 2013 is expected to average 4.4%.

The Treasury sees growth of 3.4% in 2011 compared with levels of around 5% before the recession.
 
The Bank reiterated that it would remain vigilant for signs of inflation risks emanating from demand, although Chief Economist Monde Mnyande said last month it would not raise rates solely because of higher global oil and food prices which were beyond its control.
We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.89
+0.2%
Rand - Pound
23.82
+0.4%
Rand - Euro
20.37
+0.3%
Rand - Aus dollar
12.30
+0.3%
Rand - Yen
0.12
+0.2%
Platinum
908.05
0.0%
Palladium
1,014.94
0.0%
Gold
2,232.75
-0.0%
Silver
24.95
-0.1%
Brent Crude
87.00
+1.8%
Top 40
68,346
0.0%
All Share
74,536
0.0%
Resource 10
57,251
0.0%
Industrial 25
103,936
0.0%
Financial 15
16,502
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders