Reserve Bank cuts repo rate by 50 basis points

Thursday, August 13, 2009

Pretoria - To the surprise of economists, the South African Reserve Bank (SARB) on Thursday announced a cut of 50 basis points to the interest rate.

"The MPC has decided to reduce the repurchase rate by 50 basis points to 7 percent per annum with effect from 14 August 2009," said Reserve Bank Governor Tito Mboweni, whose contract is due to expire in August.

Economists had expected the Monetary Policy Committee to leave the repo rate unchanged, as it had done in July. The central bank had until July cut the repo rate by 450 basis points.

Speaking at the end of a two-day MPC meeting in Pretoria, Mr Mboweni said although there were encouraging signs that the economic meltdown may have reached its turning point, the South African economy appeared to be lagging behind.

"It is likely that the domestic economy contracted in the second quarter of this year. The domestic economy remains constrained by weak global and domestic demand," said Mr Mboweni.

The governor said inflation had declined materially outside the inflation target range. South Africa's inflation target range is between 3 and 6 percent.

Expectations were that it would take some time before inflation returns within the target range.

"Cost push pressures appear to be the main source of upside risk to the inflation outlook," he said.

On the outlook for inflation, Mr Mboweni said that CPI inflation was expected to continue its moderate downward trend and was likely to return to the targeted range in the second quarter of 2010.

Statistics South Africa is due to release the country's second quarter Gross Domestic Product figures next Tuesday.

Senior economist at Investment Solutions Chris Hart told BuaNews that the surprise cut was good news for borrowers.

"It is good news for borrowers, it is a surprise given the level of inflation. Economic weakness was the main reason for the decision with retail and manufacturing data being weak," said Mr Hart.

Economists had predicted that consumers were not likely to see a reduction this month.

Nedbank economist Isaac Matshego said that the decision was likely due to the fact that many households were experiencing financial difficulties.

"It was a pleasant surprise. The economy is weak and data shows that households are under financial stress," said Mr Matshego.

Both he and Mr Hart added said another decrease was likely in October due to negative data that has been released and Gross Domestic Product figures that will be released next week showing weakness.

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