South Africa’s central bank cut its repo lending rate by 100 basis points on Tuesday to boost waning economic growth as a global downturn knocks exports and as household demand falls.
The drop in the repo to 9,5% — as expected — adds to 150 basis points in cuts since December and further unwinds five percentage points in hikes between June 2006 and June 2008.
It comes after the Reserve Bank brought forward its policy meeting by more than three weeks, and added more meetings for the year, following the release of a series of weak economic data.
Reserve Bank Governor Tito Mboweni said domestic demand was expected to remain under pressure due to declining disposable income and weaker global growth.
”The weak global demand has been reflected in the export performance of the South African economy,” he told reporters at a televised press conference.
”Domestic output has been impacted appreciably by these external and domestic demand developments, resulting in a further widening of the domestic output gap.”
He warned, however, that the fact that the central bank would hold more frequent policy meetings did not imply that rates would be cut every month.
The latest cut in the repo rate was widely expected, with 24 of 28 economists polled by Reuters last week predicting a 100 basis point reduction.
But government bonds weakened, with yields rising sharply as some investors may have been looking for a bigger cut.
Africa’s biggest economy has been hard hit by a global downturn, with recession in developed economies knocking demand for, particularly, resources and vehicle exports, while households are straining under the weight of still relatively high interest rates.
Commercial banks quickly followed the central bank move, announcing their prime lending rates would fall, but at 13% borrowing costs remain restrictive.
Africa’s biggest economy contracted 1,8% in the fourth quarter of 2008 and new indicators point to further weakness in the first quarter of 2009, putting it on course for a first recession in 17 years.
Manufacturing output plunged 11,1% year-on-year in January and exports collapsed 25%, while new vehicles sales and mining production continue to dive.
Inflation has also slowed since peaking in August last year, although at 8,1% in January, consumer inflation remains outside the 3% to 6% target.
But with the rates decision coming a day ahead of the release of February inflation data, the central bank appears less concerned about prices than growth.
Mboweni said consumer inflation was expected to be back in the 3% to 6% target range in the third quarter of this year, before briefly breaching it again.
”The most recent central forecast of the bank shows a near-term deterioration in the inflation outlook but a more favourable trend is forecast for the medium term, which is the relevant time frame for monetary policy,” he said.
Mboweni also said the deficit on the current account narrowed to 5,8% of gross domestic product in the fourth quarter of 2008, from 7,8% in the previous period.
This was largely due to a smaller deficit on service and dividend payments.
Gross domestic expenditure contracted by an annualised 3,9% in the final quarter of last year, while household spending declined by 2,7%, he said.
The data had been due for release in the Reserve Bank’s quarterly bulletin on Wednesday. — Reuters