Nasreen Seria

The Reserve Bank disappointed financial markets yesterday by keeping its repo rate steady at 7,5%, despite painting a benign inflation outlook.

The Bank governor Tito Mboweni said CPIX would peak at just above the midpoint of the 3%-6% inflation target this year, and ease after that.

Economics Editor

THE Reserve Bank disappointed financial markets yesterday by keeping its repo rate steady at 7,5%, despite painting a benign inflation outlook.

Bank governor Tito Mboweni said CPIX (consumer inflation excluding mortgages) would peak at just above the midpoint of the 3%-6% inflation target this year, and ease after that.

This was only slightly higher than the latest inflation figures, which put CPIX at 4,3%, the 16th consecutive month that inflation was within the target range.

The decision to hold rates steady appeared to be a compromise between committee members, with Mboweni acknowledging that the committee had "deliberated extensively on the appropriate policy stance".

Markets had priced in a two-thirds chance that rates would drop 0,5 percentage point, given the benign inflation outlook.

Driving the committee’s decision to keep rates steady were strong domestic demand and uncertainty about the outlook for the rand.

However, the committee did not appear to rule out an interest rate cut in future, saying that it would "stand ready to adjust the stance in either direction if necessary depending on the outlook for inflation".

Econometrix chief economist Azar Jammine said yesterday that the committee appeared to be holding open the door to a possible easing in rates at the April meeting.

"They obviously wanted to cut (yesterday), but in the wake of the rand’s fall recently, the decision doesn’t come as a surprise.

"The environment might be more conducive for a rate cut in April. CPIX could fall close to 3% over the next three months, and the Bank may come under more pressure to cut," Jammine said.

The rand has plunged 6,5% against the dollar since the committee’s previous meeting in December, hitting a four-month low of R6,28 earlier this week on the back of a rebound in the dollar.

A weaker rand could boost inflation by raising the costs of imported goods and increasing the likelihood of a hike in petrol costs.

However, the outlook for the rand remained uncertain, with the committee stating that it was unclear how far adjustments to "global imbalances" would proceed. This appeared to be an oblique reference to the dollar, which has depreciated steadily since 2003 on growing concerns of the massive current account and budget deficits in the US.

The dollar’s slump helped to boost the rand 19% against the US currency last year, eroding export competitiveness.

The committee said it would continue to assess the effect this had on the rand, inflation and the "need for SA to have a competitive and stable exchange rate".

Mboweni clarified this later by saying it was "absolutely important SA had a stable exchange rate", and that he favoured neither an undervalued or overvalued currency.

"We rather want a currency that does not bring huge imbalances to the domestic economy."

Implying that the Bank would not prefer a very weak rand either, he said the bank would not want a currency that created "unnecessary price pressures on the upside".

The committee also raised concerns about rocketing demand for bank credit and surging money supply growth.

"During 2004 there was a reallocation of funds from longer-term deposits to short-term deposits. Increases in these deposits usually reflect a rise in the transaction demand for money."

The rand surged to R6,14 (R6,23) against the dollar after the rate announcement.