South Africa Gets an Eighth Interest Rate Cut

September 9, 2010

With an as-expected 50-basis point repo rate reduction to 6.0% announced today, the South African Reserve Bank has in eight steps now halved its repo rate.  Six of the moves totaling 500 basis points were implemented between December 2008 and August 2009.  No changes were made at the subsequent four policy meetings including the first one of this year.  A cut of 50 basis points was announced in March, then two more meetings passed without any new action.

Today’s move was justified in a statement released today by several factors.

  1. The rand had risen 4.0% in trade-weighted terms since the prior meeting in July and by more against the dollar and euro.  Intervention to slow and smooth appreciation presents difficulties for monetary policy.
  2. An uncertain global landscape has become more heightened.  As a result, abnormally low policy rates seems likely to persist for and extended period of time in a number of advanced economies.
  3. Expected and actual inflation have fallen.  SARB officials announced a downward revision to their inflation forecast.  the current 3.7% probably represents a cyclical low, but inflation is now thought likely to rise to 4.8% in 2011 and 5.1% in 2012.
  4. South African GDP growth, which was 3.2% annualized in 2Q after 4.6% in 1Q, will probably slow further in the second half of this year.  Sub-trend economic activity is seen continuing for some time.  Personal consumption is being constrained by high debt and unemployment.
  5. Money and credit growth remain weak.

Unlike the statement released by officials in July, today’s no longer calls present policy settings “appropriate.”  However, officials do explicitly indicate that scope for further cuts seems “limited.”

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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