Reuters: Financial Services and Real Estate: UPDATE 2-S.Africa leaves rates unchanged, CPI risks unclear

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UPDATE 2-S.Africa leaves rates unchanged, CPI risks unclear May 24th 2012, 17:17 Thu May 24, 2012 1:17pm EDT * SARB cuts inflation forecasts, admits weak rand poses risk * International oil prices moderating * Global uncertainty undermining local growth (Changes dateline, adds quotes, background, reaction) By Xola Potelwa JOHANNESBURG, May 24 (Reuters) - South Africa's central bank left its repo rate steady as expected on Thursday, sounding a warning about the effects of a bleak global outlook on the fragile domestic economy but saying inflation was likely to moderate. Africa's biggest economy and a leading emerging market is struggling to gain traction after a 2009 recession, especially as exports to the euro zone - its biggest trading partner - stutter while Europe wallows in its debt crisis. The bank admitted the inflation picture was muddier than at the previous policy meeting two months ago, however, due to the effects of a sharply weaker rand. "In this highly volatile and uncertain environment the MPC is of the view that it is appropriate to maintain the current accommodative monetary policy stance," Governor Gill Marcus said, holding the repo rate at 5.5 percent. All 31 economists polled by Reuters last week expected the bank's Monetary Policy Committee to keep the rate at which it lends to commercial banks at three-decade lows to help support economic growth. The bank has kept rates steady for the past 18 months, and most of the surveyed economists expect them to remain unchanged throughout 2012 as the central bank tries to stimulate a fragile economy against an increasingly turbulent global backdrop. The market could now start talking about a rate cut as the bank appears slightly more dovish, changing from expectations from two months ago that the next move on rates would be up. "The statement showed the MPC to be more bullish on inflation, bearish on growth risks and bearish on external risk from the intensifying eurozone crisis, though offset in part by increased bearishness on the rand. "These changes suggest the probability of a September rate cut has increased, but do not really show the ground being laid for a cut quite yet," said Peter Attard Montalto of Nomura. Europe absorbs about a quarter of South Africa's exports and declining trade with the region will hit the manufacturing sector, which accounts for 15 percent of GDP. Marcus said last month monetary policy needed to be "accommodative" because the economy is continuing to run below par, despite 650 basis points of cumulative rate cuts from 2008 to the end of 2010. The bank cut its growth forecast slightly for this year, with growth now seen at 2.9 percent in 2012 compared to previous expectations of 3.0 percent. "The global uncertainties impart a downside risk to the domestic economic growth outlook which remains relatively subdued," Marcus said. Adding to the domestic economy's troubles is a naggingly high unemployment rate. About a million jobs were lost during the 2009 recession and have not been recovered. First quarter unemployment stood at just over a quarter of the workforce, which puts pressure consumer spending which had previously driven economic growth. Finance Minister Pravin Gordhan has said the economy needs 7 percent growth on a sustained basis to make a dent on the unemployment rate. INFLATION RISKS The bank also lowered its inflation forecasts, saying prices had probably already peaked in the first quarter compared to previous expectations of CPI peaking in the second quarter at 6.5 percent. However, the rand has lost nearly 9 percent in the last two months and could weaken further if the situation in Europe deteriorates, putting those forecasts at risk unless the effect of lower oil prices takes the pressure out of prices. "The balance of risks to the inflation outlook is less clear," Marcus said. The yield on the benchmark 2015 momentarily dropped 1.5 basis points to 6.34 percent after Marcus said she believed inflation had peaked in the first quarter. "Given that the statement was clear in the increased downside risks to the economic outlook and less clear about the risks to inflation, we would argue that at the margin, it is slightly more dovish than the March meeting," said Leon Myburgh sub-Saharan Africa strategist at Citi. (Reporting by Xola Potelwa; editing by Ron Askew) Link this Share this Digg this Email Reprints

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