/ 5 February 2009

Reserve Bank cuts repo rate by 100 basis points

The South African Reserve Bank’s monetary policy committee (MPC) on Thursday decided to reduce the repo rate by 100 basis points to 10,5%.

This takes the prime overdraft rate in South Africa to 14% from 15% before and will usher in significant relief for cash-strapped consumers.

Interestingly, Mboweni said he had recommended a cut of 200 basis points to the committee after returning from the World Economic Forum in Davos.

”They probably thought it was the snow, but I went in there all guns blazing,” he said.

Earlier on Thursday, RMB currency strategists said that the size of the rate cut by the Reserve Bank would make no difference to the local currency.

”Will the rand care one way or another? With the rest of the world going to zero interest rates, it will make little difference to speculators if South African rates are at 10,5 % or 11%,” said RMB’s John Cairns in a statement.

Cairns said the importance rather was what signal Thursday’s decision sent.

”Cut 100 basis points and the market’s expectation of aggressive cuts all the way down to close to 7% looks justified. Cut less and the view will have to be reassessed.”

Cairns said the rand needed interest rates that were consistent with a contraction in the current account deficit — which, after the trade data revision, wasn’t quite as bad as economists had thought.

South African inflation had braked sharply in December, partly on a big drop in fuel costs, data showed last week, which hardened the case for an aggressive rate cut.

Statistics South Africa said CPIX (consumer inflation less mortgage costs) — which will be replaced in January as the targeted measure for monetary policy with a re-weighted consumer price index (CPI) — slowed to 10,3% year-on-year.

December’s reading was its lowest level since March 2008, dipping from 12,1% in November.

Stern message
In his speech Mboweni also sketched a bleak picture of the economy, saying there will be a ”rough patch” over the next two, three or four years and had a stern message for politicians who were telling their supporters otherwise. This comes just ahead of the elections around April.

”Any politician who does not communicate that reality to their supporters is living in cloud-cuckoo land. There is no decoupling and there is nothing special about SA — it is part of the global economy,” emphasised Mboweni.

”We must conduct ourselves in the manner that we are part and parcel of the global economy,” he added.

He said the domestic economy was adversely affected by continuing turbulence in the global economy and that this would place further downward pressure on inflation going forward.

Mboweni said that the inflation declining trend was continuing and that the central bank had factored in the changes to be brought about by a new consumer price index (CPI) basket from next month.

But he also noted that some risks to the inflation outlook remain. He said the rand continued to pose the main upside risk to the inflation outlook. — I-Net Bridge, Sapa, Reuters