Reserve Bank slashes repo rate

Thursday, November 18, 2010

Pretoria - Christmas has come early for cash-strapped consumers as the South African Reserve Bank's Monetary Policy Committee (MPC) cut the repo rate by 50 basis points to 5.5 percent - the lowest in 30 years.

Governor Gill Marcus said the central bank viewed this to be consistent with its inflation target measures, adding that the scope for a further cut was limited.

To date, the repo rate has been cut by 650 basis points since December 2008.

The central bank expects inflation to average 3.5 percent in the fourth quarter of 2010, climbing to 4.3 percent next year and 4.8 percent in 2012, as opposed to a prior forecast of 5.1 percent.

Governor Marcus said the domestic economy remained fragile and that adverse global developments made the growth outlook uncertain.

"We are dealing with very uncertain times," she said, adding that the global recovery has continued in an uneven way with downside risks in several developed economies.

The MPC said further fiscal stimulus in the United States appeared unlikely and that heightened uncertainty in the Euro zone - especially with concerns in the Irish banking system - have raised fears of possible contagion within Europe and possibly to the global financial sector.

"Should the problems in the Euro area not be resolved in an orderly manner, there are risks of a sudden reversal of capital flows to emerging markets," cautioned Marcus.

South Africa's rand has appreciated by over three percent against the dollar since the MPC's last meeting. However, the governor made it clear the rate cuts were not meant to weaken the rand.

Business Unity SA (BUSA) welcomed the news.

"Given the present internal and external economic trends, it is the right move. With interest rates now at their lowest in 30 years, it will help to strengthen the business and consumer confidence needed to enable the economy to reach and exceed a 3 percent growth rate over the year ahead," said BUSA.

Nedbank said it had expected the decision.

"The MPC's action was in line with our expectations following data, which pointed towards the domestic recovery losing some momentum, and inflation falling further than was initially expected.

"Indications are that the SARB has reached the end of its cutting cycle. Another cut would require negative growth surprises both globally and locally or perhaps significant further rand appreciation," said Nedbank.

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