South African Reserve Bank (SARB) governor Tito Mboweni said on Thursday that the central bank would cut the repo rate by 150 basis points to 8,5%, effective from October 17.
Mboweni made the announcement at the end of a two-day meeting by the SARB’s monetary policy committee.
This is the fourth cut so far this year, after the bank cut by 150 basis points in June, 100 basis points in August and 100 basis points in September.
In a replay of expectations for the June MPC meeting, most South African economists expected a 100 basis points cut, but equally, many were hoping for more.
The forward interest rate market has priced in a 150 basis points cut after better-than-expected August money supply data was released at the end of September.
The repo rate at 8,5% is now at its lowest rate since the repo system was introduced in March 1998.
The main findings of the MPC were that:
- The international economy is continuing to recover, albeit in a protracted and uneven fashion;
- There seems to be little reason for inflationary pressures to rise in South Africa’s main trading-partner countries;
- There has been a major realignment of currencies in the world as a result of developments around the United States dollar;
- Domestic economic growth has slowed down;
- The external value of the rand has recovered to levels last seen in the middle of 2001;
- Domestic final demand is continuing to increase, supporting domestic production as well as the growth in the volume of imported goods, although there are imbalances particularly in the externally-exposed sectors;
- Employment creation remains one of the main problems in South Africa; and
- Most importantly from a monetary policy perspective, inflation pressures have abated further and this is expected to continue.
South African banking group First National Bank was the first of the major retail banks to match the SARB’s cut in the repo rate.
FNB announced a reduction of its prime lending rate by 1,5% from 13,5% to 12% with effect from Monday October 20 2003. The adjustment will take effect on all prime-rate linked products, it said.
Interest rates for new and existing FNB HomeLoans customers will also be reduced by 1,5% on October 20.
Michael Jordaan from FNB said: “The rate cut does not indicate that the SARB is taking a softer line on inflation. Inflation figures remain the key driver in interest rate movements. The bottom of the interest rate cycle is, however, dependent on whether the decline in inflation will now start to level out.”
Jordaan added that savers need not despair. Lower inflation means that returns on fixed deposits remain in positive territory. — I-Net Bridge