The Reserve Bank cut the repurchase (repo) rate 50 basis points to 6% on Thursday, in a move designed to provide additional stimulus to “the somewhat fragile recovery of the domestic economy”, said the bank’s governor, Gill Marcus.
Domestic economic growth declined in the second quarter of 2010, to 3,2%, following a growth rate of 4,6 % in the previous quarter, and is “expected to moderate further”, Marcus said.
The lowering of interest rates is designed to spur economic activity by making money cheaper and boosting consumer spending.
The repo rate is the rate of interest at which the Reserve Bank lends money to commercial banks. A cut in the repo rate at which usually leads to commercial banks in turn reducing the prime rate it lends money to consumers. Prime currently stands at 10%.
Assessing the impact of the rate cut, already at its lowest level in three decades, Stanlib economist Kevin Lings told the Mail & Guardian: “The majority of South Africans use credit and will be happy, but pensioners and others who supplement their income with savings will not.
“But interest rates come down only once inflation has been brought under control, so your pensioner will be experiencing the benefits already,” Lings said.
He believed the economy was currently in a “sweet spot” where the window for a rate cut was as favourable as it would ever be.
Low levels of global inflation, low food prices and a strong rand have brought the consumer price index (CPI) inflation down to 3,7%, well within the Reserve Bank’s 3%-6% target band.
But Investec economist Annabel Bishop predicted this week that recent public sector wage increases in excess of inflation, combined with administered price rises for electricity, water, petrol and cellphone communication, will probably mean that the September repo rate cut will be the last in the current inflation cycle.
And, in a veiled reference to the public sector wage strike, Marcus appeared to agree. “Some wage demands and a number of settlements have been made without regard to the lower inflation outcomes and the improved inflation outlook,” she said.
“Unless accompanied by higher productivity, such settlements could put pressure on domestic prices and impact negatively on our international competitiveness.”