South African Reserve Bank decides to maintain repurchase rate at 5%

By Toni Weeks

San Diego, Jan. 24 - The South African Reserve Bank's Monetary Policy Committee decided to hold the repurchase rate steady at 5%, according to a bank news release.

The committee said that since the previous meeting, there has been some improvement in global financial market sentiment, but economic growth prospects in some major advanced economies or regions remain constrained. Downside risks to the outlook persist in many countries, especially in the eurozone. In the absence of clear evidence of a sustained recovery, particularly against the backdrop of a relatively benign global inflation environment, monetary policy in most countries will remain accommodative, the bank predicted.

Domestically, economic growth is expected to continue to be well below what is possible and what is required to improve unemployment. Ongoing labor conflict, the proposed scaling down of mining operations and ratings agency downgrades are symptomatic of the challenging domestic outlook, the bank noted.

In contrast to the situation in most advanced economies, the risks to the inflation outlook remain on the upside, due mainly to continued exchange-rate and wage-cost pressures. The year-on-year inflation rate as measured by the consumer price index for all urban areas was 5.7% in December, up from 5.6% in November.

The inflation forecast for 2013 has deteriorated compared to the previous forecast, the committee said. Although the forecast does not yet include the new CPI weights and rebasing recently announced by Statistics South Africa, their impact on inflation trajectory is expected to be marginal when incorporated formally into the next forecast.

After averaging 5.6% in 2012, inflation is now expected to average 5.8% in 2013, with a peak of 6.1% in third-quarter 2013, and 5.2% in 2014, compared to the previous forecasts of 5.5% and 5%, respectively. The deterioration is largely due to higher-than-expected food-price inflation, the lagged effects of the depreciation of the rand and higher-than-expected unit labor costs.

The monetary policy stance remains appropriate and accommodative, the bank stated. Further accommodation at this point is constrained by the upside risks to the inflation outlook, thus influencing the committee to keep the repurchase rate unchanged. The bank will continue to closely monitor developments, the release said.

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