Reserve Bank paves way for rate cut

The South African Reserve Bank paved the way for a one percentage point cut in prime lending rates on Thursday when it reduced its repo rate by the same margin.

Governor Tito Mboweni said in Pretoria the repo rate — at which money is lent to commercial banks — would decline to 11% on Friday.

Absa, First National Bank, Nedbank, Old Mutual and People’s Bank announced they would drop their prime lending rates by one percentage point from 15,5% to 14,5% percent on the same date.

Explaining the repo rate decision by the central bank’s monetary policy committee (MPC), Mboweni said the body had no choice but to adopt a balanced approach.

“Although the inflation outlook generally still seems to be favourable, there are certain developments in the domestic economy which require the committee to remain vigilant.”

Some economists have been calling for a more aggressive rate cut, contending that a reduction of at least 1,5% would be justified.

Mboweni said a matter of particular concern for the MPC was recent wage settlement rates of about 10%.

“Nearly all the salary and wage increases this year have been above the current inflation rate and have been negotiated in an environment of declining productivity,” he said.

“High nominal unit labour costs will inevitably put pressure on price increases.”

Another cause for concern was the high rates of increase in some administered prices, the governor said.

He also cited the continued strong domestic demand for goods and services as an inflation risk.

The high domestic demand in the first half of the year had been financed to some extent by means of bank credit. Money supply had also accelerated in the past three months.

Mboweni listed several factors which he said favoured a further decline in consumer price inflation. These included the fiscal discipline applied by the government. The recovery of the external value of the rand also boded well for moderate price increases.

“Thirdly, the generally low inflation in the rest of the world is assisting South Africa in combating domestic inflation,” Mboweni said.

International oil markets were also somewhat more stable.

Mboweni said there was scope to ease monetary policy as the central bank’s inflation target of between 3% and 6% was within reach.

But the risk factors listed were as real.

“Taking all this into account, the MPC has decided to reduce the repo rate by 100 basis points,” Mboweni said.

The move was widely welcomed. The South African Chamber of Business (Sacob) said the cautionary stance of the MPC was justified. Although inflation had declined, risk factors remained. They included the level of recent wage increases, buoyant consumer demand and credit extension to the private sector.

“Sacob therefore agrees with the conservative approach by the MPC to lower interest rates in a moderate manner and to review its monetary policy stance at its next meeting.”

The Federation of Unions of South Africa said the cut could not have come at a better time and was vital to stimulate economic growth. — Sapa