Reserve Bank Governor Tito Mboweni took the cautious option on Thursday, leaving the repo rate unchanged at 7,5%. The rates standstill prompted Chris Malikane, head of economic research at Pan African Advisory Service, to complain that the bank had missed an opportunity to “show it is concerned about unemployment”.
Following a surprise rate cut in August, there were expectations that there might be room for a further cut this week. Calls for a cut were supported by benign inflation conditions, with CPIX (inflation minus mortgage rates) currently standing at a record low of 3,7%. Hopes of a cut were dealt a blow by high oil prices, which broke through $50 a barrel recently. Another factor was continued strong domestic spending. A rate cut would have “fuelled the fire”, according to Absa economist John Loos. Â
Announcing the decision in Pretoria on Thursday, Mboweni reaffirmed the bank’s confidence that CPIX would stay within the target band for the next two years.Â
He said that while consumer price increases over the past two years had been firmly under control, service price increases were “stubbornly” high. From an overall annual increase of 7,4% in October 2002, service price rises were still running at 8,2 % in February this year and in August stood at 6,6%.
The governor’s two concerns remain credit growth and oil prices. He pointed out that growth in asset-backed loans, usually extended to households, grew 11,8% in August, accompanied by a broad money supply rise of 13,3%.
On oil prices, he pointed out that the monthly average crude price rose from $18,60 a barrel in December 2001 to $42,80 a barrel in September this year.
Malikane had called for a cut on the basis that labour cost increases and inflation expectations were contained, while there was persistent excess capacity in the economy.
According to the latest survey of inflation expectation by the Bureau for Economic Research at Stellenbosch University, analysts, business executives and trade union officials expect that CPIX will stay within the target range of 3% to 6% for the next three years.
This is the first time since the survey’s inception in 2002 that all groups believe inflation will stay within the Reserve Bank’s target range.
Malikane also argued that domestic fundamentals, including the strong rand, ensured that the impact of high oil prices would not be as severe as feared. He predicted that the surge in oil imports during the second quarter of this year, purchased at a lower price, would act as a buffer. He also said wage settlements, even the recent deal in the platinum industry, were not a threat.
“The bank places undue weight on the deviation of the inflation rate from its target,” he said, “and not enough weight on the deviation of output from its potential.”
He added that there was excess capacity in areas such as manufacturing, of which the most telling measure was unemployment.