South Africa cuts interest rate


20 July 2012

South Africa’s Reserve Bank decided on Thursday to cut its interest rate for banks, known as the repo rate, by 50 basis points to 5.0%. The prime rate at the country’s retail banks will now decline to 8.5%.

Prior to Thursday’s cut, the Bank’s monetary policy committee (MPC) had kept the repo rate at a more than 30-year low of 5.5% for its last nine meetings. The repo (repurchase) rate is the rate at which the Reserve Bank lends money to the country’s banks.

“While it is recognised that such a move on its own will not overcome the challenges facing the economy, it is felt that it can help alleviate some of the pressures faced by some sector,” Reserve Bank governor Gill Marcus said following the MPC’s fourth meeting this year.

The South African Chamber of Commerce and Industry (Sacci) welcomed the decision.

“This decision will go a long way towards alleviating cost pressures on households and businesses (and SMEs in particular), although the measure in and of itself is unlikely to have a significant impact on improving economic activity,” Sacci said in a statement.

The cut was a welcome indication that long-term inflation is expected to moderate.

The Reserve Bank revised its economic forecast for 2012 and 2013 slightly downwards. South Africa’s gross domestic product (GDP) growth is now projected to moderate to 2.7% (from a previous 2.9% forecast) before it picks up to 3.8% (from a previous 3.9% forecast) in 2013.

In a research note, Nedbank economists said the decision was “unexpected but not unreasonable given the rapid deterioration in the global economy in recent weeks.

“What happens next depends on whether the combined global monetary stimulus sparks some recovery later in the year (in which case rates will remain stable) or whether the global economy slips into recession (expect further easing)”, Nedbank said.

Nedbank added, however, that it expected rates to remain stable well into 2013.

The MPC will hold its next meeting from 18-20 September.