The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) on Thursday announced a 150 basis point cut in the repo rate to 12% at the conclusion of its two day meeting in Pretoria.
The majority of South African economists had been expecting the MPC to cut the repo rate by 100 basis points, but equally many hoped for more given the significant downward revision to consumer inflation data announced on May 30.
Reserve Bank Governor Tito Mboweni said the decision was based on a number of factors favouring lower inflation as well as the widening of the differential between South African interest rates and those of its major trading partners owing to a general decline in international interest rates.
“In taking this decision, the committee recognises the progress achieved so far in reducing inflation and the prospect that inflation may fall within the target range later this year. But the committee will remain vigilant to the risks going forward, particularly those relating to wage settlements, administered prices and the uncertain outlook for the global economy. The committee will be ready to take whatever actions are necessary in either direction in the light of the way future risks materialise,” Mboweni said.
He added that projections of the likely rate of inflation for 2004, calculated by using the Reserve Bank’s core and other forecasting models, indicated that on the policy stance to date, the average rate of increase in the CPIX would be close to the midpoint of the inflation target band in 2004.
Both Standard Bank and First National Bank (FNB) announced that they would lower their prime and home loan lending rates following the announcement.
Standard Bank was the first of the country’s major banks to announce that it would cut its prime overdraft and mortgage lending rates by 150 basis points from 17% to 15,5% from Friday. It indicated that this cut applied to both new and existing clients.
FNB, the second of the country’s banks to make an announcement, said it strongly welcomed the cut in the repo rate and would drop its prime lending rate by 1,5% to 15,5% with effect from 13 June.
A similar reduction in home loan rates of 1,5% has also been made for new home loans from tomorrow and from Tuesday 17 June for existing home loans.
“The one-and-a-half percent rate is a pleasant surprise and very welcome for consumers, the banks and business,” says FNB CEO, Wendy Lucas- Bull.
“The size of the cut is more than expected and will provide both relief to consumers, and a stimulus to the economy. A person with a home loan of R100 000 will now save R150 a month and with the prospects of more rates cuts to come, will continue to gain benefits.
“Hopefully it will be the first of a number of rate cuts during the rest of the year and possibly even into 2004.”
Commenting on the latest rate cut, FNB’s chief economist, Dr Cees Bruggemans, said, however, that real interest rates — the difference between prime and inflation — remain high.
“CPI forecasts for the next six months indicate that inflation may fall to 4% — presently it is 8,5%. This creates great scope for further rate cuts. We could end 2003 with prime at 13%-14% and be looking forward to further cuts in early 2004.
“Credit demand is softening and GDP figures for 2003 have been disappointing, so these factors present the Reserve Bank with good reasons to reverse the rate hikes of 2002.”
Banks in the Nedcor group — Nedbank, Old Mutual Bank and Peoples Bank — have announced a 150 basis point decrease in both the prime overdraft rate and the mortgage rate applicable to home loans from 17% to 15,5%.
The new overdraft rate is effective June 13. The new mortgage rate on existing homeloans comes into effect 17 June and the rate on new home loans comes into effect June 13. – I-Net Bridge