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Interest rate unchanged but outlook bleak

The South African Reserve Bank's Monetary Policy Committee (MPC) has left the repo rate at 5,5% because, according to Governor Gill Marcus, South Africa and the global economy face a bleak outlook at the moment.
She says that growth in emerging markets is likely to outperform that of the more advanced economies, there is a risk of capital flowing out of emerging markets and means that these economies are unlikely to emerge unscathed from the current economic turmoil.

Marcus says that recent data confirmed the fragile and uneven nature of the domestic economic recovery and warned that unfavourable forward-looking indicators are consistent with a downward revision of the bank's economic growth forecast.

"The combination of declining growth and rising inflation poses a challenge to the monetary policy going forward and is a feature being experienced by a number of emerging markets," Marcus said.

She referred to the consumer price index remaining unchanged at 5,3% for August from July but warned that it is expected to rise as a result of higher food, petrol and electricity prices and will peak at 6,2% in 2012.

She says that emerging markets remain vulnerable to a significant slowdown or recession in advanced economies. However, the extraordinarily low interest rate environment in advanced economies has resulted in strong capital flows to emerging markets, affecting exchange rates and asset prices.

Marcus warns that these trends may suddenly reverse because of the perceived risks of the emerging markets.

Read the MPC's full statement.
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