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Economic slowdown ushers in 50 basis point cut

by Michael Appel
on 11 Dec 2008
BuaNews Online
BuaNews Online

In line with market expectations Reserve Bank Governor Tito Mboweni on Thursday announced a 50 basis point cut in the repo rate, lending further reprieve to debt burdened South Africans.

"The Monetary Policy Committee [MPC] considered recent developments in the South African economy and the risks to the inflation outlook against the backdrop of conditions prevailing in the global economy and international financial markets.

"The MPC therefore decided to reduce the repurchase rate by 50 basis points to 11.5 percent per annum with effect from 12 December 2008," said the governor.

The South African economy has been affected by the significant global slowdown that has intensified recently, Mr Mboweni said, adding that the domestic economy experienced negligible growth in the third quarter of 2008.

There have been some notable improvements in inflation outlook; however, risks posed by uncertainty with regard to the exchange rate, in particular, remain.

With an unchanged monetary policy stance, inflation is expected to continue its downward trajectory to return to within the 3 - 6 percent inflation target band by the third quarter of 2009.

Inflation is expected to average 6.2 percent and 5.6 percent in 2009 ad 2010 respectively and then average 5.3 percent in the final quarter of 2010.

Mr Mboweni did however highlight that economic forecasts are subject to greater uncertainty than usual die to the highly volatile global environment.

"The exchange rate remains the most significant upside risk to the inflation outlook. Since the previous meeting of the MPC, the Rand exchange rate has depreciated against the US dollar by about 11 percent.

"On a trade weighted basis, the rand has depreciated by around 7.6 percent since the previous meeting," the governor explained.

Economist at Econometrix Treasury Management (ETM) George Glynos told BuaNews on Thursday that a 50 basis point cut was the most realistic and prudent decision the MPC could have made.

"Although a 100 basis point cut is certainly what the market was hoping for, such aggressive rate cuts would further expose South Africa's widening current account deficit which will weaken the rand.

"Inflation is going to drop off sharply but what is more important is that a stable and sustainable economic environment is created.

"The main reason for such a decision is the need for longer term stability," said Mr Glynos.

Just a few months ago, economists were forecasting that inflation would dip back within the Reserve Bank's 3 - 6 percent inflation target range by the third quarter of 2009.

Substantial changes in the global and domestic economic environment have occurred and the target range is now expected to be reached by March 2009, Mr Glynos said.

If the markets remain on course, Mr Glynos said, South Africans can expect the next six meetings of the MPC to announce consistent 50 basis point cuts in the repo rate.

The governor, however, declined to comment on whether further rate cuts could be expected in the future saying, "I do not know how far the repo rate can drop...I have absolutely no clue," he said. - BuaNews


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