Repo rate drops by 100 basis points

Thursday, February 5, 2009

Pretoria - Struggling consumers have been granted a reprieve with the announcement of a 100 basis points cut in the repo rate by Reserve Bank Governor Tito Mboweni.

The decision to cut the repo rate, made by the Monetary Policy Committee, following their two-day meeting, was driven by a significant reduction in domestic inflation as well as global economic growth.

"Since the previous meeting of the MPC, domestic inflation has continued on its downward trend. A further decline is expected in the January data when the reweighting and rebasing of the CPI index implemented by Statistics South Africa comes into effect at the end of this month.

"With respect to economic growth, the domestic economy is being adversely affected by the continuing turbulence in the global economy," Mr Mboweni said.

Economist at Econometrix Treasury Management (ETM) Russell Lamberti told BuaNews the 100 basis point cut clearly shows that the Monetary Policy Committee (MPC) is focused on the deteriorating economic outlook for South Africa.

"The reality is that closer to the meeting it started to become clear that a 100 basis point cut was on the cards.

"The decision was likely based on the somber mood that prevailed [at the World Economic Forum] in Davos.

"The 100 basis point cut is not imprudent, but what we feel would be imprudent would be if they drop interest rates too far," Mr Lamberti said.

The Reserve Bank Governor added the widening domestic output gap and declining international commodity prices were expected to exert further downward pressure on inflation going forward.

Despite the positive outlook for inflation, South Africa's export market is shrinking at a rapid rate as a result of the global recession and the country's economic growth is going to suffer, he highlighted.

The Consumer Price Index, excluding interest on mortgage bonds, CPIX, which will be replaced by the CPI, excluding owners equivalent rent, on 25 February, has been moderating consistently since August 2008 when it measured 13.6 percent.

In November and December 2008, inflation had declined to 12.1 percent and 10.3 percent respectively.

Electricity, food, and clothing and footwear prices were the main contributors to the inflation outcomes in these months, he said, adding these prices increased at year-on-year (y/y) rates in excess of 15 percent.

Petrol prices increased by 25.8 percent in November 2008, but declined by 1.8 percent in December, the governor said.

"Partly as a result of the reweighting and rebasing of the new targeted inflation index, CPI inflation is expected to decline further and average 7.5 percent in the first quarter of 2009, and decline to below the upper end of the inflation target range during the third quarter of the year when it is expected to average 5.2 percent," he said.

Mr Mboweni did, however, highlight that although inflation would return to within the 3-6 percent inflation target band, that it would again breach the upper end of the target range in the first quarter of 2010.

"Thereafter inflation is expected to return to within the target range and remain there until the end the forecast period when it is expected to average 5.5 percent," he told media.

The biggest risk to inflation and a possible deterrent for future rate cuts he said is the local currency which hovered around the R9.30 level to the US Dollar in the first week of January 2009.

On another positive note, Mr Mboweni said food and oil price inflation, which was the main culprits of interest rate increases in 2008, seemed to have subsided.

Meanwhile, looking ahead to the next MPC meeting in April 2009, Mr Lamberti said a further 50 basis point cut was on the cards, but after Thursday's decision, he was leaning more towards another 100 basis point cut.

The MPC's decision brings the repo rate down to 10.5 percent, with commercial banks expected to drop the prime lending rate to 14 percent.