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Economy seen out of recession by end of 2009
South Africa Reserve Bank keeps interest rates on hold
Inflation risks balanced but power price increases a worry
October 22, 2009
By Reuters
South Africa's central bank left its repo rate flat on Thursday, as expected, on signs the economy is on the mend and given concern about the impact on inflation from expected big power price increases.
In his final announcement as governor before leaving the post next month, Tito Mboweni said enough had been done to pull the economy out of recession.
He also debunked a media report that the rand currency may be frozen.
The Reserve Bank has cut the repo by a total of 500 basis points to 7.0 percent since December to help boost growth.
Mboweni said the economy was recovering, albeit slowly, while the overall risks to inflation had not changed much from the monetary policy committee meeting in September.
He warned, however, about the impact of big power price hikes.
"The substantial electricity tariff increases requested by Eskom are seen to be the main longer-term threat to the inflation outlook," he said at a televised press conference, adding above-inflation wage increases were also an upside risk.
Power utility Eskom has asked for price increases of at least 45 percent a year for the next three years, adding to the 31 percent jump this year to try to pay for more capacity.
Mboweni said the possible increases were not included in the bank's inflation forecast, which still saw CPI back in the 3 to 6 percent target band sustainably by the second quarter of next year. Consumer inflation stood at 6.4 percent year-on-year in August.
For now, the committee was happy with rates where they were.
"Nobody in the committee argued for a reduction in the repo rate nor did anybody argue for an adjustment upwards ... the general feeling was that we are at the correct level," he said.
South Africa's government has given its blessing to the proposed power price hikes but public opposition is fierce, including from the ruling ANC's trade union allies, an increasingly powerful influence on government.
The increase must still be approved by the energy regulator.
FIRST INCREASE
Mboweni said the economy should come out of recession by the end of the year, helped by a global recovery.
The domestic improvement was tentative, though, and the outlook gap would remain positive for some time, he said, suggesting the central bank may be wary of rushing to tighten policy. Factory outlook and retail sales continued to deteriorate in August, and households are under severe strain.
Analysts said the rate cuts of the past year were now over, but increases may be some time away, given the still weak economy and fairly benign inflationary environment.
"Even when Gill Marcus takes over as governor ahead of the next MPC meeting, we do not believe that any further interest rate cut is likely this cycle," Jeff Gable, head of research at ABSA Capital, said.
"Rather, the focus will turn towards when in 2010 the first small hike might be warranted."
A Reuters poll conducted last week of 30 economists saw the overwhelming majority not expecting a hike before the second half of next year. Mboweni also dismissed a Sake24 report saying the minister of economic development was working on a plan to "freeze" the rand, which had earlier added to investor fears of a policy shift to the left, weakening the currency.
Ebrahim Patel's office later rejected the story.
Responding to a question from a Sake24 reporter, the minister said: "You are the ones who started this story about the refrigerator for the rand, aren't you?"
"It looks like your sources might have concocted the story during lunch."
The rand was slightly firmer after the rates announcement and Mboweni's remarks and had recovered most of its earlier losses sparked partly by the "freeze" report.
Mboweni, who has repeatedly warned about the strength of the currency, stressed that the bank did not have a preferred level for the rand, and reiterated the government policy to let the market decide. - Reuters
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