The Reserve Bank left interest rates unchanged, but its statement provides a clear view on the South African economy...

The South African Reserve Bank (SARB)'s Monetary Policy Committee (MPC) left interest rates unchanged with the repo rate at 5.5 percent and the prime overdraft rate at nine percent during its meeting in May. 

The decision was taken against a backdrop of a deepening economic crisis in Europe. Since Europe is an important trading partner for South Africa, developments there impact on South Africa.

For consumers the unchanged interest rates means that the cost of servicing debt is still the lowest it's been for a while, yet debt levels remained stubbornly high at around 75 percent (household debt at a percentage of household disposable income) during the last quarter of 2011.

SARB on inflation

Inflation is forecast to revert to within the target by the third quarter of this year.CPI¹ for April 2012 came in slightly below market consensus at 6.1 percent compared to six percent in March. 

On a month-to-month basis inflation only increased 0.4 percent compared to a 1.1 percent increase for March.  Not surprisingly, the biggest increase in April was the transport sector which incorporated the large (71 cents per litre) increase in petrol prices.

The higher energy prices do not appear to have fed through to second round effects² although core inflation (excluding petrol and energy prices) has ticked up to 4.5 percent.   According to the SARB, the forecast for core inflation continues to show a moderate upward trend in the short to medium term.

Core inflation is expected to peak at an average of 5.5 percent in the second quarter of 2013, marginally higher than the previous forecast, before moderating, and averaging 4.5 percent in the final quarter of 2014. No doubt the SARB will continue to watch this closely.

Food inflation remained unchanged since March, although this might be impacted in the months to come by an uptick in global food prices as well as rand weakness.

SARB on growth

The Bank’s central forecast for GDP³ growth is more or less unchanged since the previous meeting of the MPC. The bank expects economic growth of 2.9 percent for 2012, 3.9 percent for 2013 and 4.1 percent in 2014.

There is no doubt that the gloomy prospects of the global economy have had some effect on South Africa's growth for the first quarter of this year. Growth in real GDP moderated from 3.2 percent in Q4 2011 to 2.7 percent during Q1 2012. Although growth slowed it was better than the consensus forecast.

Article continues on page two: economic growth — the drivers and brakes...