BoB leaves interest rates unchanged

Staff Writer | Thursday April 22, 2010 00:00

In February, BoB left its main lending rate steady at 10 percent, saying longer-term inflation was seen under control while economic growth remained weak.

In an e-mailed statement, BoB spokesman Chepete Chepete says the Monetary Policy Committee (MPC) met on Tuesday and decided to again leave the bank rate unchanged at 10 percent because the current state of the economy and the assumptions on both the domestic and external economic outlook, as well as the inflation forecast, suggest that  'maintaining the prevailing interest rates is consistent with the achievement of the Bank's 3 - 6 percent inflation objective in the medium-term'.

However, the central bank rate will not be expected to stay at 10 percent for long because inflation, which is currently at the upper end of the 3 - 6 percent objective, is forecast to rise steeply in the short-term and the bank does not expect it to fall back within the objective range until mid-2011.

'The low domestic demand pressures, together with the projected benign external inflationary pressures, contribute to the positive inflation outlook in the medium-term,' says the statement.

'In the short-term, inflation is projected to rise due to, among others, the faster quarterly price increases given price developments in South Africa, (and) the increase in both VAT and electricity tariffs.

'In the medium-term, inflation is expected to be within the objective range on a sustained basis by mid-2011.'The risks to this outlook include any substantial upward adjustment in administered prices and government levies. Moreover, the bank says there is a risk that any accelerated world economic recovery may lead to a rise in fuel prices.

It is also anticipated that the Pula exchange rate will be largely stable with minimal effect on domestic price developments.

The government increased VAT from 10 percent to 12 percent effective April 1 from which it expects to amass a further P700 million (US$100 million) to compensate for dwindling diamond revenues while electricity tariffs will increase by an average 30 percent effective May 1, 2010.

As a result of the VAT and power tariff increases, inflation is seen much higher from April with analysts seeing it edging towards just under 8 percent in the month of April.

Motswedi Securities analyst Gary Juma says he sees inflation surging to around 7.8 percent for the month of April while economist Dr Keith Jefferis reckons the rate will be in the 7.5 - 8 percent range.

Commenting on the state of the economy, BoB says it is expected that GDP, while improving, will remain below trend in the medium-term. 'Although exporting sectors will benefit from recovery in world demand, domestic economic activity will be subdued because of reduced government spending,' the statement reads.

'Furthermore, demand and its impact on economic activity will be low, owing to the effect on real incomes of the wage freeze and the increase in VAT, administered prices and other levies.'

The low domestic demand pressures, together with the projected benign external inflationary pressures, contribute to the positive inflation outlook in the medium-term.