Reserve Bank leaves rates unchanged

South Africans received a slight inflation breather when the repo rate, at which the South African Reserve Bank (SARB) lends money to banks, was left unchanged at 11% on Thursday.

The prime interest rate therefore also remains unchanged at 14,5%. The current tightening cycle that began in June last year remains at 400 basis points.

SARB Governor Tito Mboweni made the announcement following a two-day meeting of the bank’s monetary policy committee (MPC).

There are still significant risks to the inflation outlook, noted Mboweni.

In his address, he highlighted oil, food and electricity prices, but noted that some moderation in the first two was being noted in the SARB’s equations. However, he pointed to concerns regarding the effects of Eskom’s 14,2% price increase on the overall CPIX data.

He added, though, that the economy has continued to respond to the tighter monetary policy stance. Inflation is expected to peak in the first quarter of 2008 at an average of about 8,5%.

“The slowdown in global growth could have spillover effects on the South African economy, which is also being affected adversely by electricity-supply constraints,” he noted.

At the previous MPC meeting on December 6, Mboweni had indicated that CPIX was expected to peak at 7,8% in the first quarter of 2008 and then dip below 6% only by the second half of 2008.

This time, he again said that the return to below target is expected by the final quarter of 2008 and that it would then remain around the 5,6% level for most of 2009.

“The higher near-term projections are a result of slightly higher inflation outcomes, and further revisions to assumptions about administered prices,” he explained.

The electricity increases will affect administered prices, together with expected increased medical costs well above 6%.

Notably, Mboweni pointed out that there is a 0% chance of CPIX returning to target in Q1, and only 1% in Q2, 10% in Q3 and 65% in Q4. “In 2009, there is a greater probability distribution that we will be inside the target range, all things remaining the same,” he said.

Analysts feel that this means a rate cut could at best be expected some time in 2009.

Mboweni noted that while the main upside risks to inflation remain food and energy, the extent of the upside risks has moderated.

He concluded that the current-account deficit is not really a worry at this stage, pointing out that while non-resident sales had been registered, there is no saying that they weren’t buying other South African assets in turn. “Despite this [sales in equities and bonds by foreigners] we are still accumulating foreign-exchange reserves,” he said.

Mboweni concluded that while there was much “agony” among MPC members before making the decision, the decision itself was made very easily, implying there were not many members looking to raise rates this time.

He refused to be drawn on talk of a change in the inflation target, saying only that this was something for the government to decide and he could only act according to his current mandate. “The day they tell me something different, I will be able to respond.”

The consumer price index excluding mortgage rate changes (CPIX) for metro and other areas, which is used by the SARB for its inflation target, was up 8,6% year-on-year in December from 7,9% in November, Statistics South Africa said on Wednesday.

Annual CPIX for 2007 was reported at 6,5% from 4,6% in 2006, while annual CPI was at 7,1% from 4,7% in 2006.

Ridle Markus, economist at Absa, said on Wednesday in response to the CPIX figures: “I still think we will see a peak in CPIX inflation at around 9% in February. It will be a very difficult call on interest rates for the South African Reserve Bank at the MPC meeting tomorrow.”

“Yes, CPIX now looks like it will peak above 9%. But further interest-rate tightening in the face of very real downside risks to growth will be ineffectual. This is a very tough position to be in, but rates look to be on hold now,” said Razia Khan, also on Wednesday.

“Perhaps the SARB even needs to think about easing, but the inflation trajectory will not allow for that to happen soon. Risks to the currency may also be elevated,” Khan added.

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