South Africa’s c-bank keeps repo rate on hold at 5% as inflation risks weigh

By bne IntelliNews May 24, 2013

The South African Reserve Bank (SARB) decided on Thursday (May 23) to keep its key repo rate unchanged at 5%, in line with market expectations, saying its current monetary policy stance is accommodative, while the scope for further monetary easing was constrained by a weakening rand and upside risks to inflation despite sluggish economy. In July 2012, SARB cut by 50bps the repo rate, which had been staying flat at 5.5% since November 2010, in a bid to counteract downside risks posed to the domestic economy from weakening global environment, while inflation was seen within target for an extended period.

The SARB expressed a concern about the deteriorating outlook for the South African economy, stemming from the fragile global recovery; the uncertain and increasingly difficult domestic labour relations environment and the associated risks of protracted work stoppages and excessive wage increases, which causes domestic and foreign investor confidence to decline limiting capital inflows; the widening current account deficit, which poses additional pressure on the volatile exchange rate; electricity supply constraints; low consumer confidence; upside risks to inflation; and downside risks to growth and employment creation. The bank revised down its GDP growth forecast from 2.7% to 2.4% for 2013 and from 3.7% to 3.5% for 2014. It expects growth to accelerate to 3.8% in 2015.

The central bank’s inflation forecast remained relatively unchanged – it expects an average inflation rate of 5.8% for this year, 5.2% for next year and 5% for 2015. However, inflation is expected to temporarily breach the upper end of the bank’s 3%-6% target range in Q3 2013, reaching 6.1%, and to gradually decrease after that to 49% in Q4 2015.

The SARB noted also that the increasingly fraught labour relations environment and high wage demands in the mining sector in particular, are likely to continue to impact adversely on the volume of mining exports against a backdrop of falling international commodity prices and concerns about the widening of the current account deficit. It added that these developments may result in downgrading of South Africa’s credit ratings and thus raise the cost of much-needed finance.

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