South Africa Leaves Key Interest Rate at 30-Year Low

South Africa’s central bank left its benchmark interest rate unchanged and closed the door on interest rate cuts after three reductions in 2010 as rising oil prices pushed up its inflation forecast.

The repurchase rate was left at a 30-year low of 5.5 percent in a unanimous decision by the Monetary Policy Committee, Governor Gill Marcus said in a televised speech from the capital, Pretoria, today. That was in line with the forecasts of 21 of 22 economists surveyed by Bloomberg.

Oil prices above $90 a barrel may undo the impact of the rand’s rally last year in helping to curtail import costs, adding to pressure on inflation. The recovery in consumer spending, which accounts for two-thirds of expenditure in the economy, has also strengthened and will probably be sustained, Marcus said, reducing the need for further monetary policy stimulus.

“The risk to inflation has shifted to the upside,” said Carmen Nel, an economist at Rand Merchant Bank in Cape Town. “The chance of further rate cuts has been taken off the table, but the Reserve Bank will be careful not to raise interest rates given the uneven recovery in the economy.”

The Reserve Bank increased its inflation forecast for this year to 4.6 percent from 4.3 percent, and its estimate for 2012 to 5.3 percent from 4.8 percent, because of rising oil prices, Marcus said. Inflation was 3.5 percent in December. The economy’s recovery is accelerating, with growth likely to reach 3.4 percent this year as consumer spending rebounds, she said.

Rand Falls

The rand weakened past 7 to the dollar today for the first time in more than a month, paring its 17 percent rally against the U.S. currency in the final six months of 2010.

The currency was at 7.0751 per dollar as of 4:43 p.m. in Johannesburg from 7.0992 before Marcus’s speech. The yield on the R157 government bond, due 2015, rose 6 basis points, or 0.06 percentage point, to 7.63 percent.

The gains in the rand had failed to offset a 25 percent surge in the crude oil price in New York in the second half of 2010, prompting the government to increase the price of gasoline every month since October. The price was last raised by 3.3 percent on Jan. 5.

Marcus’s adviser and MPC member Brian Kahn told reporters in Pretoria today that the bank’s inflation forecast is based on oil prices of about $90 a barrel this year and “slightly higher” in 2012.

Inflation Risks

“Risks to the inflation outlook emanating from global commodity price increases have become more evident,” Marcus said. “These risks relate mainly to oil and food price developments.”

The price of white corn, a staple food in South Africa, jumped 23 percent on the South African Futures Exchange in the past six months, while wheat has climbed 21 percent in the same period.

“The Reserve Bank is likely to feel that they have done enough to encourage growth and that this is supporting the current economic recovery,” said Kevin Lings, an economist at Stanlib Asset Management in Johannesburg. “Their attention is likely to increasingly shift to assessing some of the risks around inflation.”

The Reserve Bank may not be in a hurry to raise interest rates as the economic recovery fails to reduce unemployment.

Stable Policy

“At this stage there are no signs of incipient excess demand in the economy, and unless there are significant unexpected changes in the global or domestic outlook the monetary policy stance is expected to remain relatively stable for some time,” Marcus said.

Growth slowed to an annualized 2.6 percent in the third quarter from 2.8 percent in the previous three months, the statistics office said on Nov. 23. The economy shed 86,000 jobs in the same period, leaving the unemployment rate little changed at 25.3 percent, the highest of 61 countries tracked by Bloomberg.

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