South African Reserve Bank Delivers a Surprise 50-Bp Rate Cut

August 13, 2009

South Africa’s monthly rate decision faked out market analysts for the second time in a row, as the Repo Rate was cut to 7.0% from 7.5%.  Analysts overwhelmingly expected no change in the benchmark central bank rate, although some doubt emerged recently following two very weak economic reports.

  1. Industrial production fell 17.1% in the year to June, almost as much as the 17.2% on-year drop in May.  Production fell 3.0% in the quarter.
  2. Retail sales volume recorded a fifth consecutive on-year drop, falling by 6.7% in the year to June after an on-year 4.4% decline in May.  Sales fell 6.0% y/y in the second quarter, further cementing the likelihood of a third quarterly contraction of real GDP.  GDP had earlier fallen 6.4% at a seasonally adjusted annualized rate in the first quarter and by 1.3% from 1Q08.

A streak of five straight easings by the SARB had unexpectedly ended in June, when the rate reduction that analysts predicted didn’t come.  Previously, the repo rate had been reduced by 50 basis points to 4.0% last December.  As in Australia, another country in the southern hemisphere, SARB policymakers skip meeting early in January, but the pace of stimulus was escalated to 100 basis points on February 5 and followed with three more 100-bp cuts announced on March 24, April 30, and May 28.

As in June, today’s central bank statement speaks of cost-push pressures that are making the reduction of above-target inflation a slow process.  The CPI rose 6.9% in the year to June and is expected to grind its way downward into the target corridor by 2Q10.  In June, inflation justified a pause.  But disappointment over growth conditions led to a policy compromise, as officials reduced rates half as much as they had in February, March, April and May.  Altogether the repo rate has been lowered by 500 basis points from a peak of 12% at the start of last December.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.


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