Reserve Bank governor Gill Marcus. Picture: BUSINESS DAY
Reserve Bank governor Gill Marcus. Picture: BUSINESS DAY

THE Reserve Bank’s monetary policy committee (MPC) on Thursday kept the repo rate unchanged at 5% following its three-day meeting in Pretoria, in line with economists’ expectations.

The prime lending rate therefore also remains at 8.5%.

Reserve Bank governor Gill Marcus said the Bank had also revised downwards its growth forecast for this year to 2.6%, from an earlier estimate of 2.9%, and the 2014 forecast upwards to 3.8%, from 3.6% before.

She noted that growth was “fragile and below potential” and below what was needed to address high unemployment.

Ms Marcus said the Bank’s 2014 revision was due to a “favourable global outlook”, noting, however, that risks to these forecasts remained on the downside.

The International Monetary Fund on Wednesday revised down its 2013 growth forecast for South Africa to 2.8%, from a 3% estimate in October.

On Thursday morning, Rand Merchant Bank (RMB) said in a note that there was little doubt — considering renewed rand weakness and a steady uptick in inflation — that rates would not change.

Rising inflation and weak economic growth pose a serious challenge for monetary policy authorities as these limit room to reduce interest rates to improve activity in the economy.

Fears over South Africa’s burgeoning current account deficit and investor anxiety over labour and social unrest pushed the rand past the R9/$ mark on Wednesday to trade around its lowest levels against the US currency in almost four years.

A weaker rand stokes inflation and limits the scope of the Bank to stimulate flagging economic growth. Inflation was 5.7% last month, its highest level since May and just short of the upper limit of the Bank’s 3%-6% target range.

The average annual increase in the consumer price index for last year was 5.6%, up from 5% in 2011 and 4.3% in 2010.

Ms Marcus said on Thursday that the Bank expected inflation to average 5.8% this year, peaking at 6.1% in the third quarter.

Nedbank economists said this week the exchange rate was likely to be the main risk to the inflation outlook this year. They said that barring any major depreciation, inflation should remain close to the upper end of the target range.

"While we do not expect any huge adjustments to the Bank’s inflation forecast, the impact of the labour unrest may result in modest downgrades of the Bank’s growth forecasts for 2013, while rand weakness and unit labour cost growth could push the inflation trajectory slightly higher," the RMB analysts said on Thursday.

Uncertainty in labour markets continued to "spook" foreign investors, Absa Capital currency specialist Michael Keenan said on Wednesday, adding that concern that there would be large-scale strikes later in the year would continue to drive the downward trend. "Foreigners might be spooked."

The repo rate was cut by 50 basis points to 5% in July last year — its lowest level in almost 40 years. The Bank has in total reduced the repo rate by 700 basis points since November 2008.

With Bronwyn Nortje and Ntsakisi Maswanganyi