The Reserve Bank unexpectedly cut its repo rate by 50 basis points to 6,5% on Thursday to help accelerate a recovery from last year’s recession and as inflation slows.
Thursday’s move adds to five percentage points of reductions between December 2008 and August 2009 to boost growth after weak local and global demand hit the key manufacturing and mining sectors.
Nineteen of 22 economists polled by Reuters last week expected the Reserve Bank to keep the repo rate at 7%, while three forecast a 50 basis points cut.
Consumer inflation data on Wednesday showed the targeted gauge fell back into the bank’s 3% to 6% range in February to a more than three-year low, a month ahead of the Reserve Bank’s prediction.
The survey showed the first increase in rates was seen either in late 2010 or next year, as the economy gradually recovers and with the central bank watching for renewed inflationary pressures from higher electricity tariffs.
The decision could appease the government’s labour union allies, who have long-clamoured for more cuts, saying domestic rates are still relatively high, making life hard for debt-ridden South Africans.
Finance Minister Pravin Gordhan sent Reserve Bank Governor Gill Marcus a letter last month to stress the policy committee had leeway to focus more on growth and jobs.
‘Decision is confusing’
The cut took Mike Schussler from economists.co.za by surprise.
“Wow, that’s very interesting. I was not prepared for a rate cut, let’s be honest. While the rate cut is one that should have happened, we are getting to a position when rates will start to increase again. The decision is confusing and one has to wonder whether SARB’s policy is consistent.”
Nomava Zanazo, an economist with Pan-African Capital Holdings, said she had had expected the repo rate to remain unchanged.
“However, the SARB had room to manoeuvre from given the benign inflation rate standing at 5,7%.”
Elize Kruger an economist with ADD Capital, said the cut was a good one for the economy, “considering that labour and business market is still recovering from the erstwhile recession”. – Reuters, I-Net Bridge