The Monetary Policy Committee of the SA Reserve Bank (SARB) has left the repo rate unchanged, Governor Tito Mboweni said on Thursday.

The repo rate remains at 7.5 percent while prime stays at 11 percent.

Mboweni said the inflation rate had continued its downward trend which had been constrained by relatively "sticky services price inflation".

"While the widening output gap and weak domestic demand pose a downside risk to the inflation outlook, these risks are being increasingly offset by various cost-push and exogenous factors that are impacting on the economy, as well as by deteriorating inflation expectations," he said.

The most recent consumer price index inflation forecast by the staff of the SARB showed that CPI inflation was still expected to continue its moderate downward trend and to enter the bank's target range of three to six percent during the second quarter of 2010.

It was expected to remain within the target range for the rest of the forecast period ending 2011, Mboweni said.

Global downturn has hit SA

"A more favourable exchange rate assumption has been offset by higher expected petrol price increases and higher-than-expected inflation outcomes," he added.

The domestic growth prospects would be determined to an important degree by international developments, the governor said.

"The global downturn has resulted in a significant decline in South Africa's exports in the first quarter of 2009, leading to a wider deficit on the current account of the balance of payments compared with the previous quarter."

Mboweni said the outlook for the global economy remained uncertain, but there was "a general sense of cautious optimism" that the lower turning point of the cycle might have been reached.

The governor added that the general view appeared to be that the global economy would remain under pressure for most of this year before beginning a slow recovery.

Oil a potential upside risk

Returning to the issue of inflation, Mboweni said the main upside risk to the outlook came from cost-push pressures, in particular from electricity price increases and other administered prices, as well as nominal wage increases which have generally been in excess of inflation.

"In the first quarter of 2009, the increase in unit labour cost over four quarters amounted to 11.2 percent," Mboweni said.

The governor said the international oil price had re-emerged as a potential upside risk to the inflation outlook.

"The price of North Sea Brent crude oil reached levels in excess of $70 per barrel in the past week, before declining to current levels of around $67 per barrel.

"As a result of the higher international product prices, a further petrol price increase is likely in July," he said.

Sapa

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