Reserve Bank holds steady

THE South African Reserve Bank has left the repo rate unchanged at 6,5 percent, in line with expectations, as the economy stays on course to recover from last year's recession, and on balanced inflation expectations.

Governor Gill Marcus said the main upside risk to the inflation outlook continued to emanate from cost push factors but that inflation was expected to remain within the 3-6percent target.

"Inflation expectations have remained relatively elevated albeit with a slight downward trend," Marcus said. "The monetary policy committee assesses the risk to the inflation outlook as being evenly balanced and views the current monetary policy stance as appropriate." Sixteen out of 21 economists polled by Reuters last week saw the central bank leaving rates unchanged, while five forecast a further 50 basis point cut to 6,0percent to help boost growth.

Marcus said: "We see that global economic outlook remains uncertain. The sovereign debt crisis in Europe has had a short risk, but significant long-term risks and uncertainty persist."

She said while the recovery in the domestic economy had continued, indications were that growth in the second quarter was likely to have been less favourable.

Analysts had said while the central bank would consider the outlook for growth in its decision, its focus would remain on its core role of inflation targeting, with the impact of tariff increases by Eskom pushing the consumer price index higher in the next few months.

The repo rate is already at its lowest in three decades, and the central bank might want to allow more time for the 550 basis points of cuts implemented from December 2008 to March this year to work through the system.

Luthando Vutula, the managing executive of Absa Home Loans, said he did not expect further interest rate cuts in the current cycle, although additional job losses were evident in the first quarter of the year. This, Vutula said, was bad news for the financial recovery of the household sector and eventually also for the upswing in the residential property market.

"No further cuts in interest rates will imply that the recovery in the economy, an expected gradual improvement in consumers' financial position, and possible further selective relaxations of banks' lending criteria will be the main factors driving the property market in the rest of the year and into 2011," Vutula said.

He urged consumers and prospective home buyers to control spending, while trying to reduce debt, especially with the prospect of steadily rising interest rates during the course of next year.