In line with IHS Global Insight's expectation, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) kept interest rates on hold at 7% per year at its meeting yesterday. Governor Jill Marcus stated uncertainty regarding electricity tariff increases was the main reason behind the stance. According to the report, the SARB's inflation outlook has been unchanged since the previous MPC meeting, with inflation expected to return to within the target range on a sustained basis in March 2010; it is then expected to 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%. A 25% electricity tariff increased underlies this forecast.
Significance: The SARB's near-term inflation outlook concurs largely with ours. Technical base factors will result in an above-target inflation rate over the next three months, after which it is expected to move back to within the target band for a short period. Despite weak domestic demand, low food prices, and a relatively strong currency, upside pressures will keep the inflation rate very close to the upper target band for most of the year before once again moving above the upper target in late 2010. These upside pressures include direct and indirect effects following an electricity-price increase; above-inflation wage increases, albeit lower than in 2009; and upward-trending commodity prices coupled with a possible turnaround in the exchange rate. Interest rates are thus expected to stay on hold until the fourth quarter of 2010, when a 50-basis-point increase can be expected. The next MPC meeting is scheduled for 24-25 March 2010.
