Repo rate likely to remain unchanged - Marcus

The Monetary Policy Committee (MPC) at its meeting last month surprisingly cut the repo rate by 50 basis points to 6.5%. To date the repo rate has been reduced by 550 basis points since December 2008.

“However, the scope for further easing is limited, and the repurchase rate is likely to remain stable for some time,” Marcus said on Thursday at the annual conference of the Bureau for Economic Research.

She said that domestic demand was still relatively weak but showing signs of recovery and that it is to remain relatively constrained due to high household debt levels, unemployment and that credit extension by banks remains subdued.

The governor said that although the domestic outlook looks increasingly promising, risks remain. The central bank forecasts growth to average around 2.6% this year and around 3.5% in 2011. She pointed out that growth is expected to be driven in part by external factors.

However, the governor warned against jumping to conclusions on the basis of February's retail sales (which fell by 1.5% year-on-year).

“It does not however follow that one bad retail sales number automatically leads to a need for further easing. The latest data were a confirmation of the fragile nature of consumption expenditure growth, rather than necessarily being a downside surprise requiring further stimulus,” she said.

It takes as much as 18 months for interest rates changes to be felt.

“I must emphasise that this is not an unconditional commitment,” she said, adding that it was dependent on no major developments that change the inflation outlook or changes in the risks to the outlook.

Marcus said the inflation outlook has improved despite risks due to administered price developments with inflation expected to remain within the target range.

The bank expects the deficit on the current account of the balance of payments to widen as imports respond to the higher infrastructural expenditure.

When coming to the Rand Marcus said that the last reduction of interest rates was seen by others as an attempt to weaken the currency.

“This was not a factor in our decision. Past experience has shown that the response of the rand to lowering or raising interest rates is unpredictable, and it has previously responded by both appreciating and depreciating for varying periods of time,” said Marcus.

The MPC will hold their third meeting for the year on 12 and 13 May 2010.