Repo rate remains unchanged at 5.5%

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"The Monetary Policy Committee has decided to keep the repurchase rate unchanged at 5.5% per annum," Reserve Bank Governor Gill Marcus said on Thursday, 19 January, at the end of the meeting.

The central bank said the main downside risk continued to come from global economic developments.

Analyst David Shapiro said he expected the repo rate to remain unchanged. "It is a matter of holding down," he noted, adding that although the economy was starting to show signs of recovery, there were a lot of disruptions in the economy last year, such as industrial action.

In December, the Consumer Price Index remained at 6.1% for the second month in a row breaching the central bank's target range of between 3% and 6%. Food prices, fuel as well as administered prices played a role in December's figure.

In its Monetary Policy Review released in November, the bank said it expected the inflation rate to continue trending upwards peaking at 6.3% in the first three months of 2012.

On Thursday, the bank said it now expected inflation to remain above the upper end of the target range for a "more extended period".

Inflation is now expected to peak in the second quarter of 2012 at around 6.6% before declining gradually and returning to within the target range in the first quarter of 2013, while the bank's core inflation - which excludes food, petrol and electricity - shows a moderately rising trend.

"Since the previous meeting of the MPC, the outlook for domestic inflation and economic growth has deteriorated, posing a serious challenge for monetary policy going forward. The primary reason for the worsening domestic growth outlook is the risk of contagion from the persistent crisis in Europe, which shows no sign of a speedy resolution," noted the central bank.

"The MPC remains of the view that inflation pressures are primarily of a cost-push nature, but it is concerned that a persistent upward trend in inflation and prolonged breach of the inflation target could have an adverse effect on inflation expectations which could reinforce the upward inflation dynamics.

"The MPC is also cognisant of the slowing domestic economy and feels that given the lack of demand pressures, monetary tightening at this stage would not be appropriate," said Marcus.

She said the global outlook remains clouded by the worsening conditions in the Eurozone.

"It is now generally accepted that the Eurozone is likely to experience a recession in 2012, but the extent and duration is still uncertain."

The outlook for domestic economic growth remains subdued with the bank's forecast of the annual real growth rate in 2011 estimated to be around 3.1%, while the outlook for 2012 and 2013 has deteriorated and is expected to average 2.8% in 2012 compared with 3.2% in the previous forecast.

Standard Bank economist Tebogo Mosepele said the central bank is likely to keep interest rates on hold this year in the face of rising pressures.

"A chance (although not our base case view) for a rate cut remains, however, we believe such an outcome will only materialise should economic conditions deteriorate significantly and if the inflation outlook improves in the months ahead. Our base case scenario is that the SARB's tightening cycle will only resume in the second quarter of 2013," she said.