The Monetary Policy Committee (MPC) of the SA Reserve Bank (SARB) has kept the repo rate unchanged.
At a media conference on Thursday, following the MPC meeting, SARB governor Gill Marcus said the repo rate would remain at 6,5%.
The prime rate would therefore remain at 10%. Marcus said inflation was likely to remain within the inflation target range of three to six percent over the forecast period, and that the economy was expected to continue on a recovery path.
“The risks to the inflation forecast are seen to be more evenly balanced than at the previous meeting of the MPC.”
Marcus said the main risks to the inflation outlook emanated from administered price developments and from the risks emanating from the global economy.
Global developments
She said the domestic growth outlook would continue to be affected by global developments, such as uncertainty related to the sustainability of fiscal deficits in a number of Euro area countries.
“The MPC will continue to monitor these developments closely,” she added.
Marcus said renewed fears of possible contagion had emerged which could affect the tentative recovery that had been taking place in most regions, including in South Africa.
“The concerted efforts by European governments, the European Central Bank (ECB) and the IMF [International Monetary Fund] have had some effect on calming the markets.
“However, significant risks to the global and domestic recovery remain,” she said.
Turning to the rand, Marcus said that for much of the period since the previous MPC meeting, the exchange rate of the local currency had remained relatively stable within a range of around R7,23 and R7,48 against the US dollar.
Risk aversion
The turbulence in the global financial markets had resulted in a brief but significant depreciation of the rand against the US dollar, as risk aversion returned to the markets.
However, following the announcement of the proposed government interventions in Europe, the rand appreciated to current rates of around R7.50 against the US dollar, Marcus said.
She said that on a trade-weighted basis, the rand was relatively unchanged since the beginning of the year.
Over the same period the rand had depreciated by over one percent against the US dollar, but had appreciated by around 11% against the Euro.
“At current levels the rand remains a positive factor in the inflation outlook, but this is contingent on developments in the Euro area and general risk aversion,” Marcus said.
She said global developments had also highlighted the current focus of the financial markets on the sustainability of fiscal deficits and debt ratios.
She said the South African national government deficit measured an estimated 6,7% of gross domestic product (GDP) in the 2009/10 fiscal year, compared with the projected 7,2% announced in the February budget.
“The deficit is expected to narrow over the next three years as the economy recovers, and to measure 4,7% in the 2012/13 fiscal year. “The overall government debt to GDP ratio is expected to peak at 43% in the medium term.”
Marcus said the fiscal trajectory was consistent with fiscal sustainability and the MPC did not foresee a possible conflict with monetary policy objectives should this trend be maintained.
Reaction
The decision was consistent with the governor Gill Marcus’s signals, the opposition Democratic Alliance(DA) said.
The decision should provide “a level of comfort to analysts that the governor’s commitments to greater transparency are credible”, the party said in a statement.
DA spokesperson Dion George said the key message from the MPC was that the inflation outlook had improved slightly since March.
“Inflation is expected to remain within the target range for some time,” he said.
“Increasing unemployment will constrain household consumption and thus neutralise inflationary pressure from demands for wage increases above the rate of inflation, without compensatory productivity increases,” he said.
Confidence
Keeping rates steady indicated confidence that the moderate domestic economic growth path would continue on its current trajectory — as reflected in the bank’s adjustment to its growth forecast to 2.7% in the current year and 3.6% in 2011, George said.
“The greatest risk factor remains the fragility of the global economic recovery, especially in light of the Greek debt crisis and its impact on the broader European economy, and its impact on the volatility of the rand.”
This further highlighted the inappropriateness of calls to intervene in the currency markets to influence the exchange rate.
George said there would no doubt be “some unhappiness” over Thursday’s rates decision — “but the MPC must not sway to political demands for radical cuts that could result in a pro-cyclical, rather than the necessary counter-cyclical approach as is now being pursued,” he said. — Sapa