The SA Reserve Bank opted to leave the Repo rate unchanged at 5.50% on 12th of May. This was in-line with the market consensus.
The Reserve Bank last adjusted interest rates on 18 November 2010, when they cut rates by 50bps. Following the Reserve Bank’s decision today, the prime interest rate should remain unchanged at 9.0%, which is the lowest prime rate South Africa has experienced since April 1974.
Crucially, the Reserve Bank has once again revised up its inflation forecast. Back in November 2010 the Reserve Bank expected inflation to average 4.3% in 2011 and 4.8% in 2012. In the next couple of meetings, they revised the forecast higher.
Now the Bank is saying that inflation is expected to reach the upper limit of the inflation target range during the final quarter of 2011, and to peak at 6.3% in the first quarter of 2012 before returning to within the target range by the second quarter of 2012 and remaining close to the upper limit of the range for the rest of that year.
Inflation is expected to average 5.1% in 2011 and 6.0% in 2012, compared with averages of 4.7% and 5.7% at the time of the previous meeting. The upward adjustment is mainly due to revised assumptions regarding administered price increases.
According to the Bank the main risks to the inflation outlook continue to emanate from cost push pressures, including administered prices. The acceleration in food price inflation is expected to persist for some time, despite indications that global food price inflation may have peaked.
Overall, the MPC’s view is that the underlying inflation pressures are expected to result in a temporary breach of the upper limit of the target band during the first quarter of 2012. However, the Bank highlighted that these pressures have the real potential to generate second round effects, which can result in more generalised inflation.
It is now all about monitoring for signs of “second round” inflationary pressures. We still expect interest rates to start to be hiked in the final quarter of 2011.