The South African Reserve Bank’s (SARB) monetary policy committee (MPC) decided on Thursday to cut the repo rate by 50 basis points to 8%, SARB governor Tito Mboweni announced at the end of the two-day meeting.
This brings the total amount of rate cuts to 550 basis points since the first cut this year was announced on June 12.
In a replay of expectations for the June and October MPC meetings, most South African economists expected a 100 basis points cut, but equally, many were hoping for more. In both June and October, the SARB cut by 150 basis points.
The forward interest rate market had priced in a 130 basis points cut after South Africa had its second consecutive month of year-on-year (y/y) producer deflation in October, while consumer inflation was only 1,5% y/y.
South African economists reacted to the announcement on Thursday, with Mike Schussler, economist at Tradek, saying: “I think the Reserve Bank monetary policy committee is being cautious at the moment with the 50 basis point cut. This should be positive for the rand, but neutral for the bond market. Going forward we are likely to see more cuts in the months ahead even though the governor
denies it.”
George Glynos, market analyst at Econometrix Treasury Management, said: “The 50 basis point cut was disappointing and I worry that the Reserve Bank is going to be caught behind the interest rate curve. I think the monetary policy committee took a more cautious approach as they may be seeing strong growth next year and the possibility of drought. The disappointing cut has caused the rand to strengthen dramatically. I see a maximum of a 50 basis point cut in February.”
“It is the right thing to do, I’m very happy with the decision. We have had rate cuts totalling 500 basis points already and interest rates are already low. It is important for the Reserve Bank to take cautious steps when rates are at these low levels. It is the start of the Christmas season and demand for credit is going up. It is easier to fuel demand than it is to contain it,” said Dawie Roodt, chief economist at Efficient Group.
Jac Laubscher, group economist at Sanlam, said he is pleased with the cut, “since I thought they shouldn’t have cut at all, and I have no problem with a 50 basis point reduction. I believe that the fact cited by the SARB of inflationary pressures building in 2005 is underlying their more cautious approach — we are nearing the end of the cycle of the downward trend in inflation”.
“Also, it is quite clear that this is a signal that it is the last cut within the current cycle, meaning there is likely to be no further rate cuts at all. The next MPC meeting is in late February, and this is very close to the bottom of the cycle and also very near the general elections, which given African National Congress indications are likely to be in March-April.
“The SARB is sensitive to its independence, so no rate cut is likely in February, and after this the downward cycle will be past,” Laubscher said. — I-Net Bridge