A 50-Basis Point Central Bank Rate Cut in South Africa

November 18, 2010

While central banks in other commodity-sensitive economies like Australia, Canada and News Zealand have begun to tighten monetary policy, the South African Reserve Bank remains in easing mode.  Cuts in the repo rate have been administered in two waves, a total of 500 basis points in six steps from 12% at the start of December 2008 to 7% by August 2008 and later three further reductions this year in March, September and now to 5.5%.

A statement from officials emphasizes that inflation even with today’s easing should stay in target this year as well as 2011 and 2012.  In fact, the consumer price index’s on-year forecast for the final quarter of 2012 has been revised downward to 4.8% from 5.1% assume previously, which puts such very near the center of the 3-6% target.  The latest CPI reading for September of 3.2% was near the bottom of the range.  With a 25% jobless rate and economic growth in 2Q10 of just 3.2% annualized, the South African economy is in no imminent danger of demand-pull inflation, although some cost-push pressures are starting to pick up.  Rand appreciation of about 3% against the dollar since the prior policy meeting in September is another disinflationary factor.

Officials leave the door open to further possible stimulus but, as in September’s statement, indicate that the scope for such is now limited.  This was the last scheduled policy meeting of 2010.  Rate announcements in 2011 will be made on January 20, March 24, May 12, July 21, September 22, and November 10.

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



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