Pretoria - The Reserve Bank has cut the repo rate by 50 basis points, to 6 percent.
"The MPC has decided to reduce the repurchase rate by 50 basis points to 6 percent per annum with effect from 10 September 2010. The MPC views this action to be consistent with the continued attainment of the inflation target, having given due regard to the risks to the outlook," Reserve Bank governor Gill Marcus told reporters on Thursday.
In explaining the decision, the governor said the scope for further cuts was limited but that this was going to be assessed on an ongoing basis.
To date the repo rate has been cut by 600 basis points since December 2008.
Since the MPC's last meeting in July, she said domestic inflation had moderated to lower than expected levels. It is expected that it will remain within the target range for the rest of the forecast period. This is due to the appreciation of the rand and weak domestic demand.
"Growth in the second quarter of 2010 was lower than market expectations. Growth is expected to remain below potential for some time, against the backdrop of a fragile global economy," she said.
The central bank also announced that due to the lower than expected inflation outcome it has revised its inflation forecast downwards particularly in the short to medium term. "Targeted CPI inflation is expected to reach a low point of 3.7 percent on average in the third quarter of 2010," said the governor. Inflation is expected to average 4.8 percent in 2011 and to measure 5.1 percent in the final quarter of 2012.
"The lower inflation trend has had a favourable impact on inflation expectations in the financial markets. Break-even inflation rates, as measured by the yield differential between conventional government bonds and inflation-linked bonds, declined across all maturities since the previous meeting of the MPC and remain below the 6 percent level," said Marcus.
The central bank noted that the global economic outlook continues to be characterised by heightened uncertainty. It said that though fears of a reversion in advanced economies had diminished somewhat, downside risks remain high. While low growth global outlook poses a risk for the domestic economic growth, inflationary pressure from advanced economies are likely to remain benign.
"These international developments also imply that policy rates are likely to remain abnormally low for an extended period of time in a number of the advanced economies."
The appreciation of the rand has been sustained despite further accumulation of foreign exchange reserves by the bank.
"The Bank does not target a level for the exchange rate, but takes advantage of prevailing conditions to continue to build reserves. However, this is a costly exercise, and in order to sterilise the impact on the money market, the Bank is now engaged in longer-term foreign exchange swap transactions. This in effect results in an overbought foreign exchange position, and adds to the international liquidity position, but not to the gross reserves," explained the governor.
In the second quarter of 2010, GDP came in at 3.2 percent slower than what had been anticipated.
Nedbank economist Isaac Matshego said: "Growth in the second half of 2010 is expected to moderate further. The Bank's forecast of GDP growth has declined moderately since the previous meeting of the MPC, with growth now expected to average 2.8 percent in 2010 and 3.2 percent in 2011.
"The MPC presented another dovish statement, which suggested that there could still be room for another cut even after today's move.
"Today's action was in line with our expectations following recent data, which pointed towards the domestic recovery losing some momentum and inflation falling further than was initially expected. We believe there is still downside risk to interest rates, although a further cut would require negative growth surprises both globally and locally."
Standard Bank senior economist Johan Botha said that an increase in the repo rate is likely to happen next year.
"Today's cut in the repo rate shows that the MPC is of the opinion that inflation will remain benign over the medium term, that the global economy is uncertain and that the domestic economy is fragile.
"We agree with these sentiments. An increase in the repo rate may occur by the middle of next year. We expect a growth rate in GDP of 2.7 percent for 2010 and 3.1 percent in 2011. Inflation is expected to average 4.4 percent for 2010 and to creep up to 4.8 percent in 2011," he said.
