/ 18 November 2010

Repo rate down 50 basis points

Repo Rate Down 50 Basis Points

The South African Reserve Bank has cut the repo rate by 50 basis points to 5,5%, governor Gill Marcus said on Thursday.

The prime rate would now fall to nine percent.

The decision to lower rates was based on various factors, including an improved outlook for domestic inflation.

“Since the previous meeting of the Monetary Policy Committee (MPC), the outlook for domestic inflation has improved further against the backdrop of a continued negative domestic output gap and sustained strength in the exchange rate of the rand,” said Marcus.

“Persistent low growth in the United States and renewed quantitative easing, combined with renewed concerns about the solvency of some euro-area countries, are expected to prolong the current environment of low global interest rates and continued capital flows to emerging market economies.”

Evenly balanced risks
Although there was some risk of an increase in domestic inflation, Marcus said “the overall risks to the inflation outlook are assessed to be fairly evenly balanced”.

The governor said they expected an average inflation rate of 4,3% for 2010. This fell within the target range of three to six percent.

“Inflation is then expected to remain at an average of 4,3% in 2011 and to increase to 4,8% in 2012,” she said.

The cut was in line with market expectations, but Marcus said the scope for further downward movement was limited.

Thursday’s move adds to 600 basis points of reductions in interest rates since December 2008 and leaves the repo rate at its lowest level since the central bank introduced the measure in 1999.

According to a Reuters poll, 16 of 21 economists forecast a 50 basis points cut in the repo rate.

According to a Bloomberg poll, 17 out of 22 economists expected a 50 basis points cut in the repo rate.

Banks respond
Standard Bank has dropped its interest rates by half a percentage point following the announcement by the Reserve Bank.

“Standard Bank will be decreasing its prime and home loan base lending rates from 9,5% to 9%,” the bank said in a statement.

Nedbank also announced a 50 basis point decrease in their prime overdraft rate, the vehicle and asset finance rate and the mortgage rate applicable to home loans, from 9,5% to 9%, it said in statement.

“The interest rate for both new and existing vehicle and asset finance loans, as well as new and existing home loans will decrease,” said Nedbank.

Both banks will be implementing the changes from November 19. — Sapa, Reuters