SARB reduces interest rates by 1.5%

Source: Business Africa

The Reserve Bank said on Thursday it had decided to cut its main repo rate by 150 basis points to 12.00 percent - more than most had expected - given the factors which suggested inflation would keep falling.

Governor Tito Mboweni said in a televised address the central bank would still remain "vigilant" on inflation risks, including steep wage increases, which he said may jeopardise the benign price outlook if sustained.

"In taking this decision, the (monetary policy) committee recognises the process achieved so far in reducing inflation and the prospects that inflation may fall within the target range this year," Mboweni said.

"But the committee will remain vigilant to the risks going forward, particularly those relating to wage settlements, administered prices and the uncertain outlook for the global economy."

First cut in 21 months

It was the first time the bank had cut interest rates for 21 months, and followed hikes of four percentage points in 2002 to quash soaring inflation. Economists polled by Reuters last week had forecast a one percentage point cut in the rate.

The volatile rand see-sawed after the announcement, first sliding by nine cents to 8.09 against the dollar, then firming recovering to 7.98 as markets digested the implications of the cut. Domestic banks said they would also cut their prime lending rates by 150 basis points to 15.5 percent, effective Friday.

Economists welcomed the rate cut, which they said would help spur slowing economic growth and compensate for the impact of overstated consumer inflation data, which was revised sharply down last month after the discovery of errors in rental income.

Rate cut to stimulate economy

"The lower borrowing cost will provide a stimulus to the weakening economy, but is not expected to translate into higher growth until nearer year end," Investec analyst Annabel Bishop said.

Statistics South Africa last month revised consumer price data back to January 2002 down by up to 1.9 percentage points because of an error with the calculation of property rentals.

The revisions saw the targeted CPIX rate - minus home loans - rising by an annual 8.5 percent in April from 9.3 percent in March, still well outside its three to six percent target range.

Absa Ltd, Standard Bank and First National Bank said on Thursday they would cut their prime lending rate by 150 basis points to 15.5 percent effective from Friday.