The South African Reserve Bank's (SARB's) Monetary Policy Committee on Thursday decided to leave the repo rate unchanged at 12.0 percent.

The prime overdraft rate thereby remains at 15.5 percent and the current tightening cycle, which began in June 2006, at 500 basis points.

"The MPC considered recent developments in the South African economy and the risks to the inflation outlook against the backdrop of conditions prevailing in the international financial markets. The MPC is of the view that an unchanged monetary policy stance is appropriate at this stage," said Governor Tito Mboweni.

Mboweni, however, noted that the risk profile has changed somewhat, making the inflation outlook uncertain.

He highlighted that oil prices were lower, but the weak rand had emerged as a significant risk factor.

"It depends on the extent new levels are sustained or not," he said.

No local banks came for assistance

"It will be a little longer before we come back to the inflation target range," he added.

Mboweni said, however, that no local banks had come for assistance in light of the global crisis.

He said he commends the coordinated global approach around the world of cutting rates to attempt to aid the system – "colleagues from developed central banks have come to the party".

However, he added that the MPC had not discussed cutting rates.

"I have no idea if the global crisis will bring forward the possibility of a cut," he said in answer to a question.

"The MPC is unlikely to have discussed if cutting rates would affect the rand," he added.

Mboweni pointed to a moderate improvement in the inflation outlook since the last meeting, although the peak was now slightly higher.

Rebasing of the CPI basket

"As was the case at the previous meeting, some assumptions were made to try to account for the rebasing and reweighting of the CPI basket that will be introduced by Statistics South Africa in January 2009.

Inflation is expected to peak at an average rate of 13.3 percent in the third quarter of this year, and to average 6.9 percent in 2009, after a significant decline in the first quarter of that year.

Consumer price inflation is still expected to return to within the inflation target range only in the second quarter of 2010, and to reach a level of 5.5 percent in the final quarter of that year," he said.

He said that according to the most recent inflation expectations survey conducted on behalf of the Bank by the Bureau for Economic Research at the University of Stellenbosch, CPIX inflation is expected to average 10.2 percent in 2008 and 8.1 percent and 7.4 percent in 2009 and 2010 respectively.

"The increases in respect of 2009 and 2010 were significantly smaller than the increases observed in the previous survey," he said.

However, he adds: "Inflation expectations are not well anchored."

JSE and housing markets were down

Mboweni also noted that negative wealth effects could contribute to lower consumption, highlighting that the JSE and housing markets were down.

"Domestic economic growth appears to be moderating somewhat," he said.

He added, in response to a question, that he "hopes and prays" the rand recovers with oil low and then there are not negative effects on inflation.

However, he does expect slowing global growth to have adverse effects on local growth.

"At this stage it is unclear how the crisis will unfold, but heightened risk and uncertainty is to persist for some time," he said.

He expected third quarter growth locally to likely be subdued and below the potential rate.

While he sees base effects bringing food inflation down, they will remain elevated in the short term.

Expenditure on durable goods contracted

He also points to household consumption expenditure as having remained subdued, as expenditure on durable goods contracted by almost 15 percent.

In answer to a question, he expressed concern over the negative positions from non-residents, but added: "It is not clear when they sell they are necessarily taking it out or parking it somewhere. So far the overall balance of payments position is quite positive, but they have been net sellers of equities and bonds."

In conclusion, Mboweni said: "We are convinced the position we have taken so far is the correct one to assist us come back to target."

At the August meeting Mboweni had pointed out that CPIX inflation was expected to peak in the third quarter of 2008 at an average 13 percent - it is currently 13.6 percent year-on-year.

It was, however, expected to decline in the first quarter of 2009 and then decline "gradually" to below upper end of the three percent - six percent target in the second quarter of 2010. CPIX was seen at an average 7.2 percent in 2009 and 5.9 percent in 2010 at the August MPC meeting.

New weightings are to be implemented from the January data next year, which will see food down and vehicles up.

The consensus was for South Africa's repo rate to remain unchanged at 12 percent in October and for the first rate cut to take place in April next year, according to a survey of leading economists by I-Net Bridge.

Some talk had surfaced prior to the decision that coordinated rate-cutting around the world may include South Africa.

One analyst spoken to by I-Net Bridge – who thought a cut would be a good idea and who actually predicted this may happen ahead of the news of coordinated cutting – said this was not to try and boost growth, but would rather be an attempt to protect the entire global financial system. Economists react to rates decision

Economists react to the rates decision:

Carmen Altenkirch, Nedbank:

"The decision was what we expected. There was a slight improvement in the inflation outlook, but the focus seemed to have shifted from just inflation to restoring confidence, as is the case in the rest of the world.

"Going forward, if the rand continued to weaken, the bank might not have the luxury to cut interest rates soon."

Fanie Joubert, Efficient Group:

"Well, the decision is expected. We expected the rates to be left unchanged. Unfortunately for us there is still a lot of risk in terms of inflationary pressures.

"But for our South African market, the decision taken by the Reserve Bank to keep rates unchanged was a good one, especially in order to try and keep our currency stronger."

I-Net Bridge