Reserve Bank cuts rates

South Africa’s central bank cut its repo rate by 100 basis points to its lowest level since October 2006 to revive a weakening economy that may already be in its first recession in 17 years.
The fall in the repo to 8.5 percent, as expected, adds to 250 basis points in cuts since December and further unwinds 5 percentage points in hikes between June 2006 and June 2008, Reuters notes.
Reserve Bank Governor Tito Mboweni painted a bleak picture of the local economy and said all signs were pointing to a second quarter of contraction in the first quarter of 2009.
“The outlook for domestic economic growth remains subdued, with no indications of a quick recovery,” he said in a televised statement.
“The high frequency data continue to suggest that the negative conditions recorded in the final quarter of 2008 persisted in the first quarter of 2009.”
The economy shrunk by 1.8 percent in the fourth quarter of 2008 and weak manufacturing output numbers point to another contraction, as a global downturn hits exports.
Mboweni said consumer demand remained depressed and could be restrained further by falling house prices and weak asset markets.
“The sluggish domestic demand conditions also appear to have persisted,” he said.
Commercial banks quickly followed the central bank move, announcing their prime lending rates would fall, but at 12 percent borrowing costs remain relatively restrictive.
The central bank has shifted its focus to an ailing economy, despite inflation staying outside the 3-6 percent target band.
Mboweni said although the near-term inflation outlook had deteriorated, it was expected to follow a downward trend and average 5.4 percent at the end of the forecast period in the final quarter of 2010.
“The risks to the inflation outlook as assessed by the MPC have remained relatively unchanged …. although the recent appreciation of the rand exchange rate, if sustained, may have reduced the degree of the upside risk to the inflation outlook.”
All but one of 26 economists polled by Reuters last week predicted the 100 basis point cut, with one seeing a 50 basis point drop.
The Reserve Bank added more meetings for 2009 in March to help it better respond to global developments, and will now meet every month, except for July, compared to every two months previously, opening the way for regular reductions.