Reserve Bank (SARB) governor Tito Mboweni said on Thursday that the central bank would cut the repo rate by 150 basis points to 8.50 percent, effective October 17.

Mboweni made the announcement at the end of the two-day meeting by the SARB's Monetary Policy Committee (MPC).

This is the fourth cut so far this year, after the bank cut by 150 basis points in June, 100 basis points in August and 100 basis points in September.

In a replay of expectations for the June MPC meeting, most South African economists expected a 100 basis points cut, but equally, many were hoping for more.

The forward interest rate market has priced in a 150 basis points cut after better-than-expected August money supply data was released at the end of September.

Lowest rate since 1998

The repo rate at 8.50 percent is now at its lowest rate since the repo system was introduced in March 1998.

The main findings of the committee were that:

  • the international economy is continuing to recover, albeit in a protracted and uneven fashion;
  • there seems to be little reason for inflationary pressures to rise in South Africa's main trading-partner countries;
  • there has been a major realignment of currencies in the world as a result of developments around the US dollar;
  • domestic economic growth has slowed down;
  • the external value of the rand has recovered to levels last seen in the middle of 2001;
  • domestic final demand is continuing to increase, supporting domestic production as well as the growth in the volume of imported goods, although there are imbalances particularly in the externally exposed sectors;
  • employment creation remains one of the main problems in South Africa; and
  • most importantly from a monetary policy perspective, inflation pressures have abated further and this is expected to continue.

    Economists welcome cut

    Mike Schussler, economist at Tradek, welcomed the announcement: "This is a brilliant cut and I think it will help South African economic growth next year. The cut will probably be good for the bond market, but the rand might ignore it. We have been behind the curve and now is the time to get ahead of the curve."

    Absa economist John Loos said: "This is a pleasant surprise for us, we had expected a 100 basis point cut. I think as previously expected this might put another cut for this year at the December meeting on hold. I think a further cut will take place in February."

    Colen Garrow, economist at Brait, said: "The market hadn't really expected a 150 basis point cut. This indicates the SARB is in a bit of a rush to get the cutting finished soon ? it doesn't want to be caught out of step with global interest rate moves. This raises the possibility that it won't be inclined to reduce rates further at the December MPC meeting, for fear of fuelling consumption ahead of the Christmas period.?

    He continued: ?The SARB is likely to revisit the question of further cuts at its first MPC meeting of 2004 and it could be that we are pretty much at the end of the trend of easier monetary policy. But this could depend on the reaction of the rand to the cuts. Monetary policy is likely to be on hold for now until February."

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