SARB keeps repo rate unchanged at 5%

Posted On Thursday, 24 January 2013 16:21 Published by eProp@News
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SA Reserve Bank governor Gill Marcus has announced that the central bank has decided to keep its repo rate unchanged at 5.0%.

Elements of the speech:

The inflation forecast of the Bank reflects a further deterioration in the inflation outlook for 2013 compared with the previous forecast. The forecasts do not yet incorporate the new CPI weights and rebasing recently announced by Statistics South Africa, but these changes will be incorporated formally into the Bank’s next forecast. The impact on the inflation trajectory is likely to be marginal. Having averaged 5,6 per cent in 2012, inflation is now expected to average 5,8 per cent in 2013, and 5,2 per cent in 2014 compared with the previous forecasts of 5,5 per cent and 5,0 per cent for the respective years. Inflation is expected to peak at 6,1 per cent in the third quarter of 2013 and then to moderate gradually to 5,1 per cent in the final two quarters of 2014. This deterioration is largely due to higher expected food price inflation, the lagged effects of the depreciation of the rand and higher expected unit labour costs.

Inflation expectations remain anchored at around the upper end of the inflation target range. According to the Survey of Inflation Expectations conducted by the Bureau for Economic Research in the fourth quarter of 2012, inflation is expected to average 6,1 per cent in 2013 and 6,2 per cent in 2014. This represents a marginal increase of 0,1 percentage point for 2013 compared with the previous survey, while the forecast for 2014 is unchanged. Business executives are the most pessimistic about inflation, having raised expected inflation rates to 6,6 per cent and 6,7 per cent in 2013 and 2014, while trade union respondents reduced their forecasts to 6,1 per cent and 6,6 per cent respectively for these years. The forecasts of financial analysts increased marginally but remain within the target range for the forecast period. For the past four quarters expectations for the next 5 years have remained unchanged at 6,2 per cent.

 The outlook for emerging markets, particularly those in Asia, is more positive. The Chinese economy appears to have stabilised following concerns about a possible hard landing, and consensus forecasts suggest some growth acceleration in 2013 in both China and India. Growth in Africa is expected to be sustained at rates in excess of 5 per cent, while Latin American growth is expected to be more restrained, but an improvement on 2012.

The rand exchange rate continues to pose an upside risk to the inflation outlook. The exchange rate has been impacted by the widening deficit on the current account of the balance of payments during 2012 and changing global and domestic risk perceptions, particularly relating to the adverse developments in the South African labour market, and the downgrades by the various ratings agencies. Since the previous meeting of the MPC, the rand has been fairly volatile, having appreciated initially from R8,94 to the US dollar, to R8,45 at the end of the year, but subsequently depreciated to current levels of around R9,00. Since the beginning of the year, the rand has depreciated by 6,1 per cent on a trade weighted basis and by about 6,6 per cent against the US dollar.
Risks to economic growth are assessed to be on the downside, particularly given the uncertain outlook for the mining industry and ongoing unsettled labour relations. The negative output gap is therefore expected to persist. The MPC remains concerned about the possibility of a wage-price spiral and its potential to exacerbate the high level of unemployment in the economy. As we noted in the previous MPC statement, concerted action is needed on the part of all the parties involved. We need cohesion of policy and decision making to provide the necessary certainty for sustainable economic growth and development.
The monetary policy stance remains accommodative and appropriate, with the real policy rate remaining slightly negative, notwithstanding the expected temporary breach of the inflation target. However, further accommodation at this stage is constrained by the upside risks to the inflation outlook. The MPC has therefore decided to keep the repurchase rate unchanged at 5,0 per cent per annum. As always, the MPC will monitor developments closely and will not hesitate to act in a manner consistent with its mandate.
Source: SARB

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