SA interest rates anchored amid global turmoil

"The Monetary Policy Committee [MPC] 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.

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

The announcement follows the two-day MPC meeting on Thursday.

South Africa's inflation is expected to peak at an average rate of 13.3% in the third quarter of this year, and to average 6.9% in 2009, after a significant decline in the first quarter of that year, said Mr Mboweni.

Consumer Price Inflation (CPI) is expected to return to within the inflation target range of 3 - 6% only in the second quarter of 2010, the governor said, adding that CPI would reach 5.5% in quarter four of that year.

"The recent depreciation in the rand exchange rate poses significant risk to the inflation outlook.

"Following the initial rejection by the US Congress of the Troubled Asset Relief Program (TARP), there was significant volatility in foreign markets as the dollar strengthened against a number of major currencies.

"The domestic foreign exchange was also affected and the rand has depreciated by almost 20% since the beginning of the year and by almost 9% since the previous [MPC] meeting," explained Mr Mboweni.

General consensus rates would not change

Senior economist at Econometrix Tony Twine told BuaNews that there was a general consensus that the MPC would keep rates unchanged.

"The expectation is that rates would remain unchanged, however, there are some optimists that still hoped for early interest rate cuts.

"Rate cuts are expected sometime between January and August next year, or from about the second or third quarter," said Mr Twine.

Raising the interest rate would make life very difficult because of the weak state of sectors of the real economy at the moment, Mr Twine said.

On Wednesday, international markets recovered slightly following news of interest rate cuts by central banks in the United States, the United Kingdom, the Central Bank of Europe (CBE) and the Australian Central Bank.

The US Federal Reserve, the Bank of England and the CBE all attempted to boost their economies by ushering in the 50 basis point or 0.5 percentage point interest rate cut.

The Australian Central Bank, after taking heavy blows to its markets with the Australian Dollar suffering the heaviest losses this week, announced a 100 basis point rate cut on Wednesday.

To date, Mr Mboweni said, the All-Share index on the Johannesburg Stock Exchange (JSE) has declined by about 27% since the beginning of the year, and about 25% since the previous MPC meeting.

Article published courtesy of BuaNews