Rates unchanged - SARB

Fri, 10 Oct 2008

The SA Reserve Bank has opted not to change the repo rate at which it lends money to commercial banks.

Bank governor Tito Mboweni made the announcement in Pretoria on Thursday after a two-day meeting of the central bank's monetary policy committee.

"The MPC is of the view that an unchanged monetary policy stance is appropriate at this stage. Accordingly the repo rate remains unchanged at 12 percent per annum."

Mboweni said the committee had considered recent developments in the South African economy and the risks to the inflation outlook against the backdrop of conditions prevailing in the international financial markets and the banking crisis which had deepened.

"Developments in the international markets have already had a negative impact on growth in a number of regions, and global growth forecasts are being revised down further, particularly in the OECD countries.

He said the continuing crisis had lead to a generally more accommodative monetary policy stance in a number of countries, and some governments and central banks taking unprecedented steps to help stabilise the situation.

The slowing world economy was also likely to have an adverse effect on domestic growth prospects.

"At this stage it is unclear how the crisis will unfold, but heightened risk and uncertainty are likely to persist for some time," he said.

Since the previous meeting of the committee, Mboweni said the turmoil on global financial markets had intensified.

Global markets had been characterised by declining equity prices, exchange rate volatility and widening spreads on emerging market debt.

The prices of many commodities, including oil, had also declined, although gold was a notable exception by virtue of its safe haven status.

Mboweni said however that the South African banking and financial system remained stable despite domestic financial markets experiencing the impact.

"The domestic equity market has suffered losses in line with international markets, and the exchange rate of the rand has been negatively affected by increased global risk aversion, resulting in higher volatility and a significant depreciation.

"The South African Reserve Bank is monitoring developments closely."

He said the inflation outlook remained uncertain, as the risk profile had changed.

"The outlook has improved on account of the lower oil prices, but the exchange rate has emerged as a significant risk factor."

He said the Bank's most recent forecast showed a moderate improvement in the inflation outlook since the previous MPC meeting, although the peak was slightly higher.

"As was the case at the previous meeting, some assumptions were made to try to account for the rebasing and reweighting of the consumer price index basket that will be introduced by Statistics South Africa in January 2009."

He said inflation was expected to peak at an average rate of 13.3 percent in the third quarter of this year, and to average 6.9 percent in 2009, after a significant decline in the first quarter of that year.

Consumer price inflation is still expected to return to within the inflation target range only in the second quarter of 2010, and to reach a level of 5.5 percent in the final quarter of that year.

Mboweni said the turmoil in international financial markets had resulted in some changes in the balance of risks as perceived by the committee, the most significant of these relating to oil price and exchange rate developments.

The recent depreciation in the rand exchange rate posed a significant upside risk to the inflation outlook.

Following the initial rejection by the US Congress of the Troubled Asset Relief Program, there was significant volatility in foreign exchange markets.

This was because the dollar strengthened against a number of major currencies, particularly against those in emerging market economies.

The domestic foreign exchange market was also affected.

Mboweni said the rand is currently trading at around R9.12 against the dollar, compared with R8 at the previous MPC meeting.

On a trade-weighted basis, the rand depreciated by around 20 percent since the beginning of the year and by almost nine percent since the previous meeting.

"The impact of the exchange rate on the inflation outlook will depend to a significant degree on the extent to which these new levels are sustained," he said.

International oil prices had also declined considerably over the past few weeks, said Mboweni.

The impact of the lower prices on domestic petrol prices would be offset to some extent by the recent depreciation of the rand against the dollar.