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At the last MPC meeting held on 19 July 2012, the Reserve Bank decided, rather unexpectedly, to cut the interest rate (Repo Rate) by 50 basis points to 5.0%; thus leaving the South African Prime interest rate at 8.5% (its lowest since 1946).
Prior to this rate cut, the MPC had left rates unchanged for 9 consecutive meetings at its 30-year low rate of 5.5%.
There has been much speculation as to whether this cut signals the beginning of a renewed interest rate cutting cycle. Gill Marcus, Governor of the MPC, stated that “The risks to South Africa’s moderate inflation outlook are external and further interest rate easing will not be automatic”. She told reporters that “Given the subdued domestic economy, the risks to the inflation outlook are mainly of a cost-push nature”, pointing to the fact that consumer demand remains low and thus inflation risk lies in exogenous factors such as a sudden increase in exchange rates, oil prices and administered prices.
The MPC believes that inflation is expected to stay within its target range for both this year and the next and therefore the decision to cut the interest rate was made based on their view that the global economic outlook has deteriorated even further. Therefore the interest rate was cut in an attempt to provide the South African economy with some relief from the negative effects of a global slowdown and European recession (Europe being one of SA’s main trading partners). The projected lower inflation levels gave the committee the scope to do this.
Marcus stated that although it is recognized that such a cut on its own will not be able to overcome all the challenges currently facing the economy at this time, it will still help to alleviate or reduce some of the pressures faced by many sectors within the fragile economy. “This decision will go a long way towards alleviating cost pressures on households and businesses (and SME’s in particular), although the measure in itself is unlikely to have a significant impact on improving economic activity.”
Year on year consumer price inflation came out at 5.5% in June 2012. Inflation is expected to average 5.6% in 2012 and be down to 5.1% in both 2013 and 2014. The SARB also revised its economic forecast slightly downwards. GDP growth for the year is projected to moderate to 2.7% (down from a previous 2.9% forecast) before it picks up to 3.8% (from a 3.9% previous forecast) in 2013.
Marcus stated that further easing cannot be taken for granted and that it will all depend on the changing global conditions, further inflation and growth developments. “The reality is that the further we go into the future, the less confident we can be about our future actions. I could give you my best guess, or a forecast based on all available information and reasonable assumptions, but this is likely to be wrong. Monetary policy operates in an uncertain environment at all times.” Marcus stated.
Our view is that SARB will be extremely reluctant, given the already negative, real repo rate (5.5% repo less 5.6% CPI = -0.1%) to cut interest rates further unless the economic environment deteriorates significantly. Thus our expectation is that interest rates are likely to remain on hold while the global economic ship slowly rights itself.
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