The rand lost about 20 cents against the United States dollar on Thursday at the news that the South African Reserve Bank dropped the repo rate at which it lends money to commercial banks from eight percent to 7,5%.
The move, which saw commercial banks lowering their interest rates by the same margin to 11%, has taken economists by surprise.
”It was totally unexpected,” said analyst Dawie Roodt. He explained that the currency devalued because a lower interest rate implied reduced yields for foreign investors.
The immediate effect on the rand could be reversed in the longer term however, as lower rates should boost domestic borrowing and the local economy.
Roodt said the JSE Securities Exchange reacted positively to the news, with prices rising by more than three percent during the day.
The repo rate cut was welcomed by politicians, labour and business.
According to the Democratic Alliance, the move would put more money in the pockets of consumers, stimulate business investment and boost economic growth.
The National Union of Mineworkers said: ”The lowering of interest rates alleviates or, at least, minimises the invasion of money markets by speculators with hot money”.
For its part, the SA Chamber of Business said the rate cut should not fuel inflation but rather compensate for the high oil price and the strong rand’s negative impact on the economy.
The Congress of SA Trade Unions said it hoped the move would bring some relief to industries suffering under the ”overvalued” rand, and help save jobs.
Roodt criticised the unexpectedness of the SARB’s move which he described as a ”brave step” in the light of rising interest rates elsewhere in the world and high oil prices.
Nedcor’s economic research unit described the central bank’s conclusion as puzzling. The bank set out a long list of reasons why rates should remain unchanged and then concluded that a cut was warranted, it said.
”The timing of the cut is strange, coming against the background of interest rate increases in the United States and the United Kingdom, high oil prices and extremely robust local spending figures.”
Old Mutual asset managers also described the cut as surprising, but said it should not be perceived as the Reserve Bank ”going soft on inflation”.
Reserve Bank governor Tito Mboweni said the decision of the central bank’s monetary policy committee (MPC) was prompted by an improved inflation outlook.
Inflation for the first six months of the year had been more favourable than expected. Consumer inflation minus mortgage costs (CPIX) was lower than forecast.
”The lower base, combined with the recent rise in the value of the rand, has resulted in a lower projection for CPIX inflation in the next two years,” the governor said.
CPIX was not expected to breach the upper limit of the bank’s three to six percent target range.
Mboweni said June’s five percent CPIX figure, up from 4,4% the previous month, was probably a temporary spike due to high petrol and diesel prices — which were subsequently reduced.
”CPIX inflation has now been within the inflation target range for a period of ten consecutive months,” the governor said.
Other favourable factors included a decline in the prices of imported goods (helped on by a strong rand and low global inflation) relatively low rates of increase in the prices of domestically produced goods, and a briskly growing economy.
Potential threats to inflation included increases in international oil prices, growing labour costs, and exchange rate movements.
According to Beachhead Media and Investor Relations the Reserve Bank may be forced to reverse its rate cut towards the middle of next year.
Considering the risks to inflation, ”one wonders how politically motivated the decision was,” it said in a statement. ”Could there have been a shift in the MPC’s stance away from pure inflation targeting to considerations about economic growth?”
Earlier, Mboweni said the Reserve Bank did not respond to forces it had no control over.
”We only respond when we foresee that there might be second round effects on inflation,” he told a media conference.
Mboweni denied that the lowering of the prime rate was a reaction to pressure from labour to restrict the rand’s current strength. ”We respond to the outlook of inflation going forward. If 20-million people came to the bank to protest at a time when we believe interest rates must go up, they will go up.”
Absa, Standard Bank, Nedbank, Old Mutual Bank, People’s Bank and First National Bank confirmed they would lower their prime and home loan base lending rates to 11%.
The new rate would become effective between Friday and next Monday. – Sapa