The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) on Thursday announced a 100-basis-point cut in the repo rate to 11% 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.
At the June 12 MPC meeting, the SARB pleased the market by cutting by the hoped-for 150 basis points, rather than the expected 100 basis points.
Prior to the revision, the money market had priced in a 100 basis points cut at the June MPC, but the revision meant that inflation was almost 200 basis points lower than when that forecast was made.
The reasoning is that the “theoretical” 300 basis points cut would be split over the June and August MPC meetings and the SARB would then revert back to cutting by 100 basis points at the October and December meetings.
The effect of the revision was to lower the March CPIX inflation rate to 9,3% y/y from a previous 11,2% y/y. CPIX is the headline consumer inflation excluding the effects of mortgage rates. The SARB target is an annual average of 3% to 6%. Most economists believe CPIX will move within the range in July, as the June reading was only 6,4% y/y from 8.5% y/y in April and 7,7% y/y in May.
Before the June 2003 cut, the MPC last cut in September 2001, when the monthly average exchange rate was R8,6359 per dollar. The MPC move then meant that the prime rate dropped to 13%, but four interest rate hikes last year saw the prime rate at 17% for the first half of this year.
In 1999, South Africa cut its prime rate eight times, from 23% in January to 15,5% in October. The consensus forecasts of economists in January 1999 was that the SARB would only cut five times and the bottom of the cycle would see the prime rate return to the March 1998 low of 18,25%.
In 1999, the consumer inflation rate dipped to 1,7% y/y in October and averaged 5,2% even though private sector wages rose by 9,3%. Unit labour costs only rose by 2,7% as labour productivity surged by 4,2%. The optimists expect a repeat of this scenario in 2003. — I-Net Bridge