Reserve Bank cuts interest rate by 50 basis points

The monetary policy committee of the South African Reserve Bank (SARB) has cut the repo rate by 50 basis points, Governor Tito Mboweni said on Thursday.
The repo rate is now at 7% while the prime rate is 10,5 %.

“There are encouraging signs that the global slowdown may have reached its lower turning point, although the speed and extent of the recovery are still subject to a high degree of uncertainty,” Mboweni said.

He said the South African economy appeared to be lagging behind international developments and it was likely that the domestic economy contracted in the second quarter of 2009.

“The domestic economy remains constrained by weak global and domestic demand,” he said.

Turning to inflation, the governor noted that targeted inflation declined materially in June but was still outside the inflation target range of the SARB.

“Expectations are that it will take some time before inflation returns to within the target range on a sustainable basis.

“Cost push pressures appear to be the main source of upside risk to the inflation outlook,” Mboweni said.

He noted that the year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas had declined from 8% in May 2009 to 6,9% in June.

Mboweni said producer prices had declined at a year-on-year rate of 4,1% in June, compared with a decline of 3% in May.

Turning to the outlook for inflation, he said the SARB’s most recent forecast remained “more or less unchanged” compared with the previous forecast.

“However, CPI inflation is still expected to continue its moderate downward trend and to enter the target range during the second quarter of 2010, and to remain within the target range for the rest of the forecast period ending 2011,” Mboweni said.

He said these projections were broadly in line with the Reuters consensus survey of private-sector analysts.

Mboweni noted that the outlook for the international economy appeared to have improved.

“The cautious optimism that the bottom of the cycle may have been reached continues to prevail, although some analysts still doubt the strength and sustainability of this recovery.”

He said the recovery was also not expected to be uniform across countries or regions.

Good news
According to Carmen Altenkirch, senior economist at Nedbank: “The recent weakness in economic data, combined with poor prospects for economic growth, were the main reasons behind the Reserve Bank’s decision to provide the economy with further interest-rate relief. This is certainly good news, but does highlight how very weak the local economy is.

“We still expect a further cut this year, possibly in September or October. Economic data will still look fairly poor then, and the inflation outlook would have improved as well, giving the governor some further scope to cut rates.”

Elize Kruger, economist at KADD Capital, said: “A welcome decision in light of the strain that is still evident in the real economy, especially related to escalating job losses. The positive impact of the long-awaited moderation in food prices on the inflation outcome and outlook, together with this week’s weak data on manufacturing and retail sales, give ample justification for today’s[Thursday] decision.

“However, given that we have probably reached the lower turning point in economic growth in Q1 2009, this could have been the last cut in this cycle. However, interest rates could potentially stay at this low level for the remainder of 2009 and 2010.”

The Congress of South African Trade Unions had hoped for a 200 basis point cut in rates.

Earlier this month, its spokesperson, Patrick Craven, said: “The deepening recession, combined with falling inflation, make the obsession with inflation-targeting even more irrelevant.”

Craven added that the SARB’s Tito Mboweni, “in his final announcement” as governor, could do the nation “a huge favour” by announcing a 200 basis point drop in the repo rate.

Craven said this would do much to relieve the burden on consumers and to give the ailing car and other manufacturing industries the shot in the arm they desperately needed to reverse the decline in sales and save jobs.—Sapa, I-Net Bridge