Interest rates unchanged following upbeat inflation outlook

The South African Reserve Bank’s Monetary Policy Committee (MPC) left the repo rate unchanged
at 9% at its February meeting. This decision, which was in line with market expectations, was based on the improved outlook for inflation.

According to the MPC, food, being one of the major drivers of inflation in 2006, has shown some signs of moderation. Production price inflation also shows signs of peaking. A number of developments have been supportive of this improvement in inflation:

• Evidence of an improvement in market expectations of inflation
• The yield curve has inverted further, reflecting an improvement in inflation expectations
• Wage settlements, which reflect inflation expectations, remain under control
• The exchange rate has been relatively stable since the December MPC meeting
• Although balance of payments developments suggest a larger deficit on the current account in the fourth quarter of 2006, the deterioration appears to be temporary following “exceptional” oil imports
• Despite the impact a large deficit hold for the currency and the subsequent impact on
inflation, the deficit continued to be adequately financed by foreign capital inflows and
indications are that this situation will continue
• Fiscal policy remain supportive of monetary policy
• Lower and more stable international crude oil prices
• Signs that household consumption expenditure is moderating

As a result of these developments, the Bank’s forecasting model indicate that CPIX is “no longer expected to breach the upper end of the target, but is now expected to peak at an average of around 5,6% in the second quarter of this year and to average 4,7% by the fourth quarter of 2008.” According to the MPC, the improved outlook is “primarily the result of the change in the monetary policy stance last year and the improved outlook with regard to expected
international oil price developments”.

The MPC re-iterated that the mandate of the Bank
is to keep inflation within the target range. However, the MPC acknowledged that the risk to inflation remains on the upside and they will continue to closely monitor developments with a view to adjusting the monetary
policy stance as and when required.