South Africa’s central bank left its repo rate unchanged at 7,5% on Thursday, with concerns about inflation overriding worries about a faltering economy.
The decision follows 450 basis points in cuts since December aimed at boosting growth and pulling the economy out of its first recession in nearly two decades.
While household spending remains subdued and manufacturing and mining output continue to fall, the South African Reserve Bank is also worried about stubbornly high inflation.
The targeted consumer inflation gauge slowed to 8% year-on-year in May, slightly above forecasts, while a 31,3% annual jump in electricity costs from next month and an expected big increases in fuel prices will help keep it outside the 3% to 6% band.
Only two of 26 economists polled by Reuters last week expected the no change decision, with 24 predicting a 50 basis point drop.
Global economy
”The domestic economy continues to show signs of distress in the wake of the global economic downturn,” said Mboweni.
”There are signs that the downturn, both globally and domestically, will be nearing the turning point, but recovery is expected to be slow and protracted.”
”Inflation rate has continued its downward trend which has been constrained by relatively sticky services price inflation while the widening output gap and weak domestic demand pose a downside risk to the inflation outlook. These risks are being increasingly offset by various cost-push and exogenous factors that are impacting on the economy, as well as by deteriorating inflation expectations,” said the Reserve Bank governor.
”CPI inflation is still expected to continue its moderate downward trend and to enter the target range during the second quarter of 2010 and to remain within the target range for the rest of the forecast period ending 2011.
”Overall, CPI inflation is expected to average 8,1% and 7,9% in 2010 and 2011, respectively. The growth prospects for the economy remain a downside risk to the inflation outlook.” – Reuters