BoB leaves bank rate at 10%

Brian Benza
Staff Writer | Thursday October 28, 2010 00:00

 

In its second last sitting of the year on Tuesday, BoB's Monetary Policy Committee (MPC) proved its commitment to the neutral monetary policy stance where interest rates, which have not changed since the beginning of the year, are kept low in a bid to help the economy rebound from last year's crisis.

In a statement released by its Head of Communications, Andrew Sesinyi, the central bank says the current state of the economy and assumptions on both the domestic and external economic outlook, as well as the inflation forecast, suggest that maintaining the prevailing level of interest rates is consistent with the achievement of its 3 - 6 percent inflation objective in the medium-term.

'Accordingly, the Monetary Policy Committee decided to maintain the Bank Rate at 10 percent,' says the statement.

The adoption of the neutral monetary policy stance has seen interest rates unmoved since the beginning of the year, and with no major inflation shocks expected in the near future, no change in the bank rate is expected from MPC's last sitting of the year in December.

Domestic inflation increased to 7 percent in September 2010 after falling for three consecutive months. It remains above the upper end of the medium-term objective range of 3 - 6 percent. The increase in inflation mainly reflects the rise in the cost of public transport following the upward adjustment of public transport fares and an increase in motor vehicle prices in September 2010.

'However, the underlying trend in inflation is restrained due to benign external price pressures and subdued domestic demand,' says the central bank.

Low domestic demand pressures and the forecast benign external inflationary pressures will add to the positive inflation outlook in the medium-term. Although inflation in the short-term is expected to remain above the objective range of 3 - 6 percent, it is forecast to be within the objective range on a sustained basis from the second quarter of 2011.

The positive inflation outlook is influenced by the low pressures in South Africa and the dissipation of the impact of the increase in VAT and administered prices. There are, nevertheless, upside risks to inflation emanating from any substantial increase in administered prices and government levies.

After a contraction in 2009, the economy is projected to grow at a moderate rate in the short to medium-term, with below-trend output.

Last week, a budget strategy paper showed that Government had raised its economic growth forecast for 2010 to 7.9 percent from earlier forecasts of 5.0 percent, due to a recovery in the mining industry and investments in power and water.

The level of output in the second quarter of 2010 is estimated to be 6.5 percent higher than in the same period in 2009, thus reflecting the 8 percent growth in mining output and the 5.8 percent increase for the non-mining sectors.

Output is estimated to be below trend with moderate pressures on inflation against the background of subdued growth in money supply due to a reduction in the level of foreign exchange reserves and a lower rate of increase in government expenditure, compared to the previous year.