Inflation targeted rate cut in South Africa

Inflation targeted rate cut in South Africa

by / Comments Off / 16 View / 26th March 2010

Gill Marcus, governor of South Africa’s central bank yesterday March 25th announced a 50 point cut to the country’s repurchase rate, to a new level of 6.5%.

The cut came as a surprise to the majority of experts, after recent data showed the country was on track to economic recovery. A handful of experts were able to predict the move, however, citing two main factors.

Firstly, the rand had been strong, fuelled by a low current account deficit, gaining up to 30% against the dollar last year alone. The cut would thus, by affecting the exchange rate reverse a slump in local and domestic demand for South African goods, particularly in the mining and manufacturing sectors.

Second, positive expectations regarding inflation, which from data released the day before the cut hit a three year low of 5.7% last month, also served to allay possible fears caused by the devaluation of the rand. The move will thus act to moderate inflation, in line with central bank forecasts.

Head of Africa research at Standard Chartered Bank, Razia Khan said there may be a ‘knee-jerk reaction’ by the market, but that this would not be long-lasting. The still significant demand for South African assets would help to maintain the attractiveness of the country.

At a press conference, Marcus stated that developments will be assessed continually in terms of inflation targets, and that further rate cuts are a possible option in order to ensure targets are met. Also quoted was an increase in certainty as to income from the energy sector, after proposals for a 25% increase in prices by national energy supplier Eskom were pushed through by the country’s energy regulator. The increase in certainty in controlling inflation bodes well for the country’s economic targets.

In the labour sector of the economy, positive signals were also heard. FEDUSA, the federation representing local unions, applauded the cut. A large percentage of South Africans were said to find the rates too high. Those finding themselves in debt were thus said to be struggling with the higher rates, making the recent cut likely be felt by them as beneficial. President Zuma, known for his populism and alliance with trade unions, thus seems, with this rate cut to have satisfied labour movements and the markets at the same time.