Mariam Isa
23 October 2009
Johannesburg — THE Reserve Bank kept interest rates steady yesterday, as expected, but pointed out that its benign inflation outlook did not account for the prospect of huge electricity price increases.
SA would emerge from recession at the end of this year, but the anticipated recovery was seen as "tentative" by the Bank's monetary policy committee .
Meanwhile Finance Minister Pravin Gordhan told a conference in Cape Town that SA's economy probably contract ed 2% this year, in line with consensus forecasts.
After chairing his final committee meeting yesterday, the Bank's outgoing governor Tito Mboweni quashed rumours of plans to "freeze" the rand, which had briefly weakened the currency.
He also warned that if Eskom was granted its request to raise tariffs 45% over each of the next three years it would have a "significant impact" on inflation.
"The substantial electricity tariff increases requested by Eskom are seen to be the main longer-term threat to the inflation outlook," he said.
Mboweni said that prospects for inflation "returning to its target range by the second quarter of 2010", as the Bank predicted last month "remain promising".
SA's official 3%-6% target range has been breached since April 2007, with inflation rising to 6,4% in the year to August.
But Mboweni said the Bank had not adjusted its central forecast for electricity rises "over and above" its previous assumption of 25% in the next three years.
If a rise of 45% was considered there was "no doubt" that SA's inflation outcome would be "much worse than the current forecast".
That convinced local money markets that interest rates were set to rise late next year, after being reduced by five percentage points since December. But some economists think otherwise.
Citigroup's Jean-Francois Mercier saw the committee' s statement as more "dovish" than that at its previous meeting .
The door to additional easing was not completely closed, and could re-open if growth "again disappoints" or the inflation outlook improved. "In any case, we feel quite confident that the Bank probably will not start hiking rates anytime soon," he said.
The committee described domestic demand as "subdued", and not posing a threat to the inflation outlook. "Growth is expected to improve in the coming months, but is likely to remain below potential for some time."
There were indications that the economy's "rate of contraction" had eased, allowing it to emerge from recession by the end of this year. But the picture was mixed, suggesting the recovery was likely to be "tentative".
Compared with last month, SA's inflation outlook showed a "slight improvement for 2010 and 2011", mainly due to the stronger exchange rate, the Bank said.
The rand has gained more than 27% against the dollar and nearly 20% against a trade-weighted basket of currencies so far this year. But it slid nearly 1% to R7,54/ yesterday after a report that SA's government wanted to "freeze" it at a certain level.
Mboweni, who hands over to his former deputy Gill Marcus next month, said he felt "good" about the close of his 11-year tenure.
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