The Reserve Bank of Zimbabwe, Harare. Picture: JAMES OATWAY
The Reserve Bank of Zimbabwe, Harare. Picture: JAMES OATWAY

RESERVE Bank governor Gill Marcus delivered a stern warning on the negative effects of labour unrest and policy uncertainty when she announced the Bank’s decision to keep interest rates steady on Thursday.

Labour market instability had weakened the rand, curbed economic output and threatened to lead to a wage price spiral that would deter investment and lead to job losses, she said.

"These domestic developments, if not addressed in a comprehensive and constructive manner, have the potential to derail the progress made to date whereby South Africa has been able to withstand the worst contagion effects of the ongoing global crisis.

"We need cohesion and certainty of policy, as well as unity of purpose, to build an inclusive, longer-term vision," Ms Marcus said in a statement at the end of a three-day meeting of the Bank’s monetary policy committee (MPC).

The MPC decided to hold the key repo rate steady at 5%, keeping prime lending rates set by commercial banks at near 40-year lows.

Ms Marcus held out little hope of further interest rate cuts in the foreseeable future, highlighting a range of risks to the outlook for inflation, which she said could breach its 3% to 6% official target range.

A combination of rising food prices, the weaker rand and high wage settlements prompted the MPC to revise its forecasts for inflation significantly upwards.

It said that a revamp of the goods and services measured by the consumer price index (CPI) and due to take effect in January would add 0.2 percentage points to inflation.

Inflation was now expected to peak at an average 5.7% in the first quarter of next year, recording an average rate of 5.5% in 2013 and 5% in 2014. The Bank said these forecasts did not account for the rebasing and reweighting of the CPI.

The MPC assessed the balance of risks to the inflation outlook to be "on the upside", Ms Marcus said.

But the Bank also lowered its growth forecasts, saying that the economy would expand by 2.5% this year and 2.9% next year.

At its previous policy meeting in September, the Bank predicted growth of 2.6% this year and 3.4% next year.

The risks to these forecasts remained "on the downside" as both the global and domestic economic outlook had deteriorated, Ms Marcus said.

Analysts believe that the Bank will keep interest rates steady until 2014, as the economy enters a period of stagflation — the term for a toxic mix of rising inflation, slowing growth and high unemployment.

But a few still see a chance of a rate cut if growth prospects deteriorate further in coming months.

"The fact that the bulk of the upward pressures on inflation is external in nature (leads us to) believe that the MPC could tolerate higher inflation in favour of domestic economic stimulus," Thebe Stockbroking economist Henry Flint said in a research note.