Interest-rate cut a "huge surprise"

South African economists have reacted to the South African Reserve Bank (SARB) monetary policy committee's (MPC) decision on interest rates announced on Thursday.

The MPC decided to cut the repo rate by 50 basis points to 7%.

After its previous three meetings, the MPC had kept rates steady and most economists polled by I-Net Bridge had expected rates to remain steady again.

The no-change expectation was despite the fact that CPIX inflation (headline inflation excluding mortgage costs) has been below the midpoint of the SARB's inflation target range of 3% year-on-year (y/y) to 6% y/y for 14 out of the past 17 releases.

SARB Governor Tito Mboweni announced the MPC's surprise decision.

"Although the overall performance of the South African economy seems to be reasonably well sustained, the MPC has noted with concern evidence of some slackening in activity in some sectors of the economy as a result of the move by the rand to a higher trading range over the past six months.

"It remains the view of the MPC that a competitive and stable exchange rate would contribute to continuing sustainable growth in output and employment.

"Taking all of the above-mentioned developments into consideration, the MPC has decided to reduce the repo rate by 50 basis points to 7% per annum with immediate effect. The MPC is convinced that this is appropriate in the circumstances, and consistent with maintaining inflation within the target range," Mboweni said.

Dawie Roodt, chief economist at the Efficient Group, said: "This is a huge surprise. I wouldn't have done this. I feel uncomfortable with this cut."

Mike Schussler, economist at T-Sec, said: "I think this is really good news for the South African economy. It was unexpected but a welcome surprise and it is going to be good for the bond market but not so good for the rand.

"I am encouraged by the SARB stance because the decision will be good for growth and job creation. I don't think the inflation target will go out of target in the next year or two."

Jac Laubscher, group economist at Sanlam, commented: "It is a surprise to me. I think it boils down to that the bank must be very confident that capital flows into South Africa will continue to finance the current account deficit.

"The other thing that stands out is that inflation expectations were down substantially in the first quarter and the manufacturing sector has slackened somewhat from February -- it means they are prepared to leave with a somewhat weaker rand going forward.

"Also, I would say that since they don't know how the international risks will pan out, this raises the chances that the bank may have to react in the opposite direction."

Standard Bank economist Monica Ambrosi said: "I am pleasantly surprised, really, I think this took everyone by surprise -- especially in the face of the oil-price risk. I think we'll see a flat inflation scenario for at least the next 12 to 18 months. We have reached the new bottom and I think we'll stay at these levels for a long time to come."

The South African rand weakened sharply on Thursday afternoon when Mboweni announced the MPC's decision.

At 3.34pm, the rand was quoted at R6,2558 per dollar from R6,1876 just before Mboweni started speaking. It was quoted at R8,0029 to the euro from R7,9222 before Mboweni started speaking and at R11,7570 against sterling from R11,6480 prior to the decision.

Bonds rallied, however, with the yield on the R153 falling to 8,02% from 8,17% just before the decision.

Banks cut prime rate
Following the surprise decision by the MPC, three of South Africa's major banks have announced they will be cutting prime lending and home-loan rates by 50 basis points.

Absa is to reduce its prime overdraft rate effective from April 15, while its mortgage rate will be reduced effective from April 15 for new business and from April 18 for existing business.

Standard Bank and First National Bank will both reduce their rates effective from April 18.

"The cut is a vote of confidence in our stability and growth sustainability," said FNB CEO Michael Jordaan.

"It is good news for all South Africans. Rates were last at these levels in February 1981 when prime was 10,75%, exactly 24 years ago. Prior to this, the all-time low was 10% in July 1974.

"Unlike the volatile boom-and-crash conditions of the mid-Seventies and early Eighties, the economy has now entered a golden era of low inflation with sustained growth and new jobs," added Jordaan. -- I-Net Bridge

Article from: