MPC keeps repo rate unchanged

“The MPC noted that inflation is likely to remain close to the upper end of the target range over the forecast period, and is of the view that the risks to this outlook are fairly evenly balanced.

“Electricity price increases pose the biggest upside risk, counteracted by the weak state of domestic demand. Against this background the MPC has decided to keep the repurchase rate unchanged at 7% per annum,” said Reserve Bank Governor Gill Marcus on Tuesday, following the bank's first meeting this year.

Marcus said electricity price hikes remained the single biggest risk to the inflation outlook. “We are extremely concerned about the impact,” she said.

Domestic consumption expenditure, she said, remained under stress, and that there were no perceived risks to the inflation outlook from this source.

However, she added that CPI inflation was expected to increase above the target range in the next three months due to technical base effects related to petrol price changes.

Marcus said unfavourable employment trends were likely to still constrain household consumption expenditure.

“There are continued signs that the domestic economic recovery is underway following the 0.9 percent annualised GDP growth rate measured in the third quarter of 2009. However, the recovery is expected to remain relatively subdued and below the potential growth rate of the economy for some time,” Marcus said.

The bank forecasts that GDP growth will average 2% in 2010 and 3% in 2011.

The news comes as no surprise to economists who predicted that there would be no change.

Nedbank economist Carmen Altenkirch said: “It was fairly in line with what we were expecting with the bank acknowledging weakness in the economy but also that there has been recovery in the supply side of the economy thereby somewhat reducing the need to cut the repo rate further.

“There were also some positive views on inflation except when coming to Eskom's tariff application request.”

Senior economist at Standard Bank, Dr Johan Botha, added that a further risk to inflation was the Rand as well as oil prices.

“However, data in February will reveal where the economy is. Going forward the recovery will be subdued,” he said.