The SA Reserve Bank (Sarb) has left its key repo rate at a historic low of 5.5%, in line with expectations.
The consensus among analysts was that the Sarb’s Monetary Policy Committee (MPC) could afford to leave rates unchanged as consumer inflation stayed at 6.1% year-on-year (y/y) in December for the second month in a row.
Reserve Bank govenor, Gill Marcus, said since the previous meeting of the MPC, the outlook for domestic inflation and economic growth had deteriorated, posing a serious challenge for monetary policy going forward.
“Inflation is now expected to remain above the upper end of the target range for a more extended period, but there is still no evidence of significant demand pressures in the economy. While economic growth in the fourth quarter was likely to have exceeded that in the previous two quarters, the forecast for growth in 2012 has been revised downward,” she said.
Marcus said the primary reason for the worsening domestic growth outlook was the risk of contagion from the persistent crisis in Europe, which shows no sign of a speedy resolution.
Marcus also said that the MPC expected inflation to remain outside the upper end of the target range (between 3% and 6%) for the whole of 2012, and 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.
Marcus said the MPC was 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 but were also aware of the slowing domestic economy and as such felt monetary tightening at this stage would not be appropriate
“The MPC maintains a preference for a stable interest rate environment given the conflicting pressures on monetary policy at this stage. However the Committee will continue to monitor domestic and global economic and financial developments and the risks to the outlook, and remains ready to act appropriately to ensure the attainment of the inflation target over the medium term while being supportive of the domestic economy,” she said.
To read Gill Marcus’ full statement, click here