The South African Reserve Bank has left the repo rate unchanged at 5.5%, governor Gill Marcus said on Thursday.
The prime rate would stay at 9%.
This was in line with market expectations with all 24 economists surveyed by Bloomberg agreeing the rate would be held steady.
It was the fourth consecutive meeting where it remained unchanged, after it was reduced by 650 basis points between mid-2008 and December 2010. The decision keeps the rate at its lowest level in over 30 years.
The target inflation range is between 3% and 6%. The average inflation rate for 2010 was 4.3%, compared with 7.1% in 2009.
Marcus warned the inflation outlook had deteriorated in the near term, and the repo rate was expected to breach the upper target band in the final quarter of 2011.
The Monetary Policy Committee (MPC) had previously forecast it would temporarily breach the target in the first quarter of 2012.
“Thereafter it is expected to remain at the upper end of the target range for the next two quarters, before declining somewhat in the final quarter of the year,” she said.
The year-on-year inflation rate for June was 5%, from 4.6% in May, with the main contributions to inflation coming from food, housing and utilities and transport.
Food price inflation was 7.3% in June, up from 6.3% in May.
The price of petrol increased at a rate of 21.4% and electricity prices rose at a rate of 19% in June.
Marcus said domestic economic recovery remained fragile, with a slowdown in manufacturing and weak growth in the physical volume of mining production in April and May.
Although the economic situation in Europe, particularly the debt crisis in Greece, and the threats to the economies of Spain and Italy, were a risk to South Africa, other parts of the world such as Japan and China were showing encouraging trends.
Global inflation had mainly been driven by oil and food, but this could have reached its peak.
“Both the IMF [International Monetary Fund] and Food and Agricultural Organisation food price indices show a flattening out since the beginning of the year,” Marcus said.
The main risks to local inflation were food and oil price developments.
Above-inflation wage settlements could pose a risk, but there had been a decline recorded, with Andrew Levy Employment Publications reporting an average overall wage settlement rate in collective bargaining agreements of 7.5% in the first half of 2011, compared with 8.2% in 2010 as a whole.
“However, given that most of the wage negotiations take place in the second half of the year, and that some of the recent high-profile settlements appear to have reversed the moderating trend, this positive outcome could change,” Marcus said.
“Should these higher trends set a precedent for other wage settlements, this could represent a significant upside risk to the inflation outlook.”
There was also a concern about trends in executive remuneration increases.
The MPC’s gross domestic product forecast remained unchanged from its previous meeting in May.
“Despite the expected growth slowdown in the second quarter, the forecast of the bank for GDP growth in 2011 and 2012 remains unchanged at 3.7% and 3.9% respectively, while growth in 2013 is expected to average 4.4%,” Marcus said. — Sapa