The SA Reserve Bank, once again, opted to leave the Repo rate unchanged at 7.00%. There was a general expectation that the Bank would leave rates unchanged. (Out of 22 analysts surveyed only two thought the Reserve Bank would reduce rates by 50bps). Rates have now, effectively, been on hold since August 2009.

In making the decision to leave rates unchanged, the Reserve Bank highlighted the following:

1. The global recovery has continued with relatively strong performances in some of the emerging market economies. However risks and vulnerabilities still remain. The recovery is expected to remain relatively slow in some economies that are important export destinations for South African goods.
2. Unsustainable fiscal positions as well as the need to reverse previous unconventional monetary policy interventions may also pose a risk to the global growth outlook.
3. The global environment remains benign from an inflation perspective.
4. The demand-side pressures on inflation have been persistently weak, and the MPC remains of the view that there are no significant upside risks to the inflation outlook emanating from this source.
5. The forecast of the Bank is that GDP growth will average 2,0 per cent in 2010 (STANLIB 2.5%) and 3,0 per cent in 2011 (STANLIB 3.0%). It could take some time until pre-recession levels of output are reached.
6. The CPI inflation forecast by the South African Reserve Bank is predominantly unchanged since the November forecast. In line with market forecasts, inflation is expected to return to within the inflation target range on a sustained basis in March 2010, and remain within the target range until the end of the forecast period in the final quarter of 2011, when it is forecast to average 5,4 per cent.
7. The most recent inflation expectations survey reflect no significant changes in expectations compared with the previous survey.
8. The rand has remained a positive factor from an inflation perspective. However the MPC is cognisant of the negative impact of the rand?s movements during the past year on some sectors of the economy.
9. Despite moderately higher commodity prices, there are no significant risks to the global inflation outlook.
10. International oil prices appear to have stabilised somewhat over the past months, and moderate increases have been assumed over the forecast period.
11. The outlook for food price inflation, as reflected in producer prices and futures prices, is favourable and these prices are unlikely to pose an upside risk to the inflation outlook for some time despite higher food prices in international markets.
12. The risk to the inflation outlook emanating from wage developments appears to have subsided somewhat.
13. Electricity price increases remain the single biggest risk to the inflation outlook. There is the risk that increases granted to Eskom could be markedly higher than those assumed in the Bank?s forecast, and there is also the risk that the second-round effects of these increases may be underestimated by the forecasting model.

Overall, the Reserve Bank is off the opinion that the longer-term inflation outlook remains relatively favourable. The main risk appears to be the electricity price hikes. While the domestic growth rate (especially consumer activity) remains relatively subdued, the Reserve Bank probably feels that they have already done enough. Under these circumstances we would expect interest rates to remain on hold for at least most of this year.