MPC reduces repo rate to 6.5%

Thursday, March 25, 2010

Pretoria - The Reserve Bank's Monetary Policy Committee (MPC) has cut the repo rate by 50 basis points to 6.5 percent to the delight of many South Africans.

"The improved inflation environment has provided some space for an additional monetary stimulus to reinforce the sustainability of the upswing without jeopardising the achievement of the inflation target. The MPC has therefore decided to reduce the repurchase rate by 50 basis points to 6, 5 per cent per annum with effect from 26 March 2010," said Governor Gill Marcus.

Thursday's decision follows on the two-day meeting of the MPC.

Marcus, however, pointed out that assessment by the committee was that despite clear signs that the economy has emerged from the recession, the pace of recovery is expected to remain slow.

The bank took note that the domestic economy had shown signs of recovery since the last meeting in January and that inflation expectations had moderated.

Data released by Statistics South Africa this week showed that the Consumer Price Index in February fell within the bank's target range of between three and six percent. It came in at 5.7 percent.

"Inflation has returned to within the target range and is expected to remain there for the remainder of the forecast period. The risks to the inflation outlook have declined somewhat as a result of the continued appreciation of the exchange rate of the rand and greater certainty with respect to future electricity tariff increases," said the governor.

The bank's inflation forecast is expected to average 5, 3 percent and 5, 4 percent in 2010 and 2011 respectively while it will reach a low point at an average of 4, 9 per cent during the third quarter of 2010.

Other factors contributing to the improved expected inflation trajectory include favourable food price developments as well as lower-than-expected inflation outcomes.

Growth in domestic expenditure appears to be recovering at a modest pace but does not currently pose an upside risk to the inflation outlook. This after five consecutive quarters of negative growth, real household consumption expenditure increased at an annualised rate of 1, 4 per cent in the fourth quarter of 2009.

The bank expects a turnaround in household consumption expenditure to continue at a slow pace.

The governor said the sustainability of South Africa's domestic growth recovery will be influenced by global growth trends.

Commenting on the strength of the rand, the MPC said that an excessively strong exchange rate was a cause for concern from the perspective of overall macroeconomic balance and that it could contribute to constraints in the recovery of export and import-competing sectors of the economy.

Since the MPC's last meeting, the currency has appreciated from levels of around R7, 60 against the US dollar to around R7, 35.

The MPC said although there was reduced uncertainty associated to electricity tariffs, electricity and other administered price increases remain a threat to the inflation outlook.

Marcus said the decision to cut the repo rate (Which was last cut in August to 7 percent) had been a unanimous one.

"It was a lively debate. There was no difference of view... it was a unanimous. It was not an easy decision to reach," she said.

Most economists had predicted that rates would remain unchanged.

In its commentary, Standard Bank said that data released in the last few weeks confirmed that the local economy was growing and that inflation was declining at a slightly faster pace.

"The Reserve Bank decided to reduce the repo rate by 50 basis points to 6.5 percent, expressing greater confidence about the robustness of the current positive inflation outlook. The Bank's view is that GDP growth will remain slow and does not pose an upside risk to the inflation outlook. The SARB will continue to assess developments and will adjust the monetary policy stance when necessary," it said.

Nedbank economist, Isaac Matshego, said the decision was a pleasant one.

"It is a pleasant surprise indeed. The change could be due to the new interpretation of the bank's mandate following Minister Pravin Grodhan's letter to the Governor. It now seems more focused on the demand or growth of the economy although the administrative prices pose a threat to the medium term outlook this statement focuses on the economy's recovery. The cut is meant to boost the recovery," concluded Matshego.