Reserve Bank keeps repo rate unchanged at 5%

Posted On Wednesday, 20 March 2013 15:04 Published by eProp@News
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The Reserve Bank’s Monetary Policy Committee (MPC) has kept the repo rate unchanged at 5%, Reserve Bank Governor Gill Marcus said on Wednesday.

"The MPC has decided to keep the repurchase rate unchanged at 5% per annum," Marcus said at the end of the three-day MPC meeting to discuss rates.

The governor said the committee continued to assess the monetary policy stance to be appropriately accommodative, given the persistence of the negative output gap.

On inflation, the bank's forecast showed a slight deterioration in the inflation outlook for 2013 compared to the previous forecast. The forecasts incorporate, among others, the lower electricity price increase of 8% that the National Energy Regulator of SA granted power utility Eskom. Eskom had sought a total 16% tariff increase.

Inflation is now expected to average 5.9% in 2013 and 5.3% in 2014, compared to the previous forecasts of 5.8% and 5.2%. However, inflation is expected to temporarily breach the upper end of the bank's target range (of between 3% and 6%) in the third quarter of 2013 when it is expected to average 6.3% and then moderate to 5.2% in the fourth quarter.

Marcus said the deterioration was largely due to the depreciation of the rand and higher petrol prices, which more than offset the impact of lower electricity prices. Core inflation is expected to peak at 5.1% in the second quarter of 2014.

The rand, said the governor, continued to pose the main upside risk to the inflation outlook. Since the start of 2013, the rand has depreciated by 8.4% against the US dollar. Work stoppages in parts of the mining sector and further widening of the deficit on the current account of the balance of payments have also contributed to the rand's depreciation.

"The rand is likely to remain sensitive to both domestic and global developments. The exchange rate is expected to remain volatile and subject to overshooting," she said.

The MPC also expressed concern about high wage increases on employment growth.
The governor said that the petrol price has increased by a cumulative R1.24 per litre since January 2013 and remains an upside risk.

Additionally, South Africa's prospects for growth were fragile, with gross domestic product (GDP) expected to come in at 2.7% in 2013 from a previous estimate of 2.6%.

Economists had expected the bank to keep the repo rate unchanged, though local activity indicators had been mixed since the last MPC meeting in January.

Earlier on Wednesday, Statistics South Africa (Stats SA) released the Consumer Price Index (CPI), which showed that consumer inflation accelerated to 5.9% in February from 5.4% in January.

"The outlook for inflation has deteriorated considerably, mainly on the back of the weaker currency. The March inflation number will include a 6.7% m-o-m increase in the petrol price and in April, the fuel and Road Accident Fund levies will add a further 23 cents to the petrol price (this will be partly offset by the approximately 20 cents per litre over recovery recorded so far in March).

"This will put more upward pressure on inflation, causing it to breach the 6% target range sooner than the third quarter of this year as we had forecasted earlier," said Nedbank economists.

In a research note earlier, Nedbank said that the central bank's MPC would need to strike a balance between rising inflation as evidenced in the February CPI numbers and still poor economic growth outcomes

"We believe that a neutral policy stance will best balance weak growth and rising inflation. Rates will remain at current levels for most of the year," said Nedbank earlier today.

 

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