Interest rate: no relief

Despite expecting lower economic growth than it did two months ago, the Reserve Bank's monetary policy committee has decided not to cut interest rates.

"The [committee] continues to face conflicting policy choices relating to rising inflation and slowing growth," said Reserve Bank governor Gill Marcus in Pretoria yesterday as she announced that the repo rate will stay unchanged.

The repo rate has been at an historic low of 5% (and the prime lending rate at 8.5%) for a year and most economists expect it to remain unchanged until the second half of next year.

But home buyers and other heavily indebted people were hoping for a rate cut, which would have kept money in their pockets.

In July last year the bank lowered interest rates - it then had room to manoeuvre, thanks to modest inflation.

That interest rate cut is still working its way through the economy but has been overshadowed by global events, such as the recession in Europe, and domestic factors, such as labour instability.

The Reserve Bank yesterday joined the International Monetary Fund and most economists in lowering its growth forecast for South Africa this year.

"The bank's growth forecast for 2013 has again been revised down, from 2.4% to 2%," said Marcus.

The bank expects growth next year to be 3.3%, down from earlier predictions of 3.5%.

This is way off the National Development Plan's target of at least 5% growth for the next two decades, which would have to be reached if unemployment were to be reduced significantly.

According to Rashad Cassim, head of the Reserve Bank's research department, it would be extremely difficult to bring the unemployment rate down if the economy did not better a growth rate of 2% to 3%.

Though it is tempting to cut interest rates to stimulate the economy on the demand side, the bank is mindful of rising prices and of the effect the current round of wage negotiations is likely to have on inflation.

The bank's target range for inflation is 3% to 6% and since the start of the year inflation has been approaching the upper limit of the range.

Numbers released by Statistics SA showed that in May the consumer price index was 5.6%. In April and March, consumer inflation was 5.9%.

The bank expects inflation to break through 6% late this year because of the weaker rand and higher fuel prices.