Repo rate remains at 6.5%

"The Monetary Policy Committee assesses the risks to the inflation outlook as being evenly balanced and views the current monetary policy stance as appropriate. Therefore, the MPC decided to keep the repurchase rate unchanged at 6.5% per annum," said Reserve Bank Governor Gill Marcus on Thursday, 22 July 2010, following the nine-member Monetary Policy Committee meeting.

She said the committee was aware of the fragilities and vulnerabilities to the domestic economy, driven in part by global uncertainties. The committee will continue to assess economic as well as financial developments and that should circumstances warrant it, the appropriate response will be taken.

Expected

The news comes as no surprise. Experts earlier this week predicted that the rates would remain unchanged.

"The news came as expected but there should be a cut in September [when the MPC] meets again. The rand remains a problem, economic growth remains subdued and one also has to take into consideration of economic developments externally," Investment Solutions economist Chris Hart told BuaNews.

"The central bank has left the door open," added Hart.

Nedbank in its weekly economic monitor said that there was a 45% chance of a cut due to lower inflation expectations, a relatively firm rand as well as continued uncertainty about economic prospects locally and abroad.

Since December 2008, the repo rate has been cut by 550 basis points urged by efforts to pull the South African economy out of a recession. South Africa emerged from the global meltdown in the third quarter of 2009.

At a briefing in April, the Governor said that the scope for further easing of interest rates was limited, adding that the repo rate was likely to remain stable for some time.

At its last meeting in May the Committee kept rates steady after cutting the repo rate in March by 50 basis points from 7%.

Remaining risks

Marcus said on Thursday that although immediate concerns relating to the sovereign debt crisis seems to have abated somewhat, significant risks remain. She added that the domestic outlook remained favourable with inflation expected to stay within its target range for some time to come.

The central bank expects inflation to average 4.5% in the third quarter of 2010 then increasing moderately. It is expected to measure 5.3% in the final quarter of 2012.

When coming to the global economic growth this remains uncertain. "The sovereign debt crisis in Europe appears to have had a short-term respite, but significant longer term risks and uncertainties persist. The expectation is that we are likely to see an extended period of below-potential growth in a number of regions," said the Governor.

She said that the inflationary pressures were expected to remain subdued and were not seen to pose a risk to the domestic inflation environment.

The Bank forecasts economic growth to average around 2.9% during 2010, with the uncertainties emanating from the global economy posing the main downside risks.