There is no doubt that the Reserve Bank will keep interest rates on hold this week, and no doubt that this will be the right decision. The combination of rising inflation and sluggish economic growth mitigates against a move in either direction, as does the uncertainty stemming from the sovereign debt crisis in Europe, SA’s main trading partner. There has been some recent evidence that the domestic economy is faring a little better — manufacturing output is picking up, for instance. But retail sales have slowed, while growth in investment and borrowing by the private sector is muted, showing that confidence in the economy is still weak. Overall output is expected to remain well below its potential, with many analysts now predicting tepid economic growth of less than 3% this year, slower than last year’s expected growth rate of about 3%. In fact, many believe the economy will not grow much more than 2,5% this year, a change from the previous prevailing view that growth would accelerate. This means it would be surprising if the Bank does not revise its November growth forecasts downward for this year and next, which were 3,2% and 4,2% respectively. It is clear that inflation is likely to remain outside the 3%-6% official target range in the coming months, after breaching the upper limit in November. But price increases are mainly being driven by factors beyond the control of interest rates, such as food and fuel, so a rate hike is definitely not warranted. Keeping interest rates steady in this environment is the appropriate response. In fact, Fitch Ratings gave the Bank a big thumbs-up when it revised its outlook for SA’s credit rating from stable to negative late last week. It said the Bank had successfully "managed inflation down" over the past decade, making its credibility an important strength for SA’s overall macroeconomic framework. Fitch indicated that higher inflation was not a problem, at least not at this point. The comments are in line with the view that few will criticise the Bank for keeping interest rates steady this year, even with inflation temporarily outside its target range.
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