Marcus paints bittersweet picture

2011-01-20 14:44

The SA Reserve Bank (SARB) has left the repo rate unchanged at 5.5%, governor Gill Marcus said today.

The prime rate would stay at 9%.

This was in line with market expectations and kept the rate at its lowest level in 30 years.

According to a Bloomberg poll, 21 out of 22 economists expected the Bank to keep the repo rate on hold.

The decision followed a three-day meeting of the Monetary Policy Committee (MPC) in Pretoria.

“The MPC has taken note of the improving growth outlook for the economy, and is of the view that the recovery in domestic consumption expenditure will be sustained,” Marcus told media.

“While there are increasing risks to the inflation outlook, these emanate primarily from external cost-push factors, and inflation is expected to remain within the target range until the end of the forecast period.”

She however warned that rising oil prices and global food inflation could negatively impact South Africa’s inflation outlook.

“Nevertheless, domestic inflation is expected to remain within the target range for the forecast period.”

The target range is between three and 6%. The average inflation rate for last year was 4.3% compared with 7.1% in 2009.

She said the Bank had revised its forecast upwards for consumer price inflation since the last MPC meeting.

“Nevertheless, the domestic inflation trajectory is still expected to remain within the target range over the entire forecast period to the end of 2012. Inflation is now expected to average 4.6% in 2011 and 5.3% in 2012.

“The upward adjustment is mainly due to revised assumptions of the international oil price over the forecast period, and we will continue to monitor global inflation trends closely.”

The price of Brent crude oil began to increase last November, due in part to stronger global oil demand and the exceptionally cold weather in the Northern Hemisphere.

“These price trends were also affected by US dollar developments, particularly following the announcement of additional quantitative easing by the US Federal Reserve in November.

“The domestic petrol price, which has been cushioned to some extent by exchange rate developments, has increased by 66 cents per litre since September last year, and by 11% over the past year.

“Since September, the rand exchange rate has offset the petrol price increase by a cumulative 45 cents per litre,” Marcus said.

Worldwide food prices have been driven up by tight supplies, changing weather patterns and rising demand in emerging market economies.

“To date South Africa has been shielded to some degree from these increases by the exchange rate and the bumper maize crop.”

However, the wheat price had increased almost 40% over the past year.

“Although producer price developments suggest that domestic food price inflation will remain low in the short term, these global developments, unless reversed, will inevitably impact on consumer food price inflation.”

Marcus said gross domestic product growth was “expected to remain below potential over the next two years”.

“Growth is now expected to average 3.4% in 2011. The forecast for 2012 is unchanged at 3.6%.”

She said globally, things were looking slightly better.

“The global economic outlook remains uncertain, but there appears to be increasing optimism that the recovery, albeit relatively weak, will be sustained.

“Most forecasts have been revised upwards in recent months, but indicate that global growth is expected to be slower in 2011 than in 2010. However, the prospects remain uneven across countries and regions, and a number of risks remain,” she said.

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