Reserve Bank Governor Tito Mboweni kept the repo rate unchanged as oil prices touched record highs and wage settlements remained firmly under the spotlight.
The move to keep rates on hold was seen by the Nedbank economic unit as creating room for a cut in October. A lot depends on the behaviour of oil prices and the rand between now and then.
By mid-morning on Thursday the price of Brent Crude Oil touched a fresh high of $65, the latest in a series of records displaced since the beginning of the week.
The inflation rate remains largely under control. The CPIX, inflation minus mortgage rates, stood at 3,5% for June. The Reserve Bank expects inflation to move upwards in the months ahead, owing to high oil prices. CPIX is expected to peak in the first quarter of 2006 at 5,5% and stay within target up to the end of 2007, a new forecast period for the Reserve Bank.
Although the outlook for inflation remains ”generally favourable” Mboweni took time to address wage settlement concerns. He reiterated a concern raised in April about the divergence between unit labour costs and wage settlements. He noted that wage settlements in the first half of 2005 were 6%, compared to 6,8% in the same period last year. ”Much will depend on the current round of wage negotiations” for the trend to persist, Mboweni said.
Markets had a subdued reaction to the decision, with the JSE Securities Exchange All Share Index falling from 14 280 to below 14 220 on the news. The rand strengthened from R6,40 to R6,34.