The SA Reserve Bank opted to cut the Repo rate by 50bps today to 6.00%. This was in line with the market consensus, although on Bloomberg, 2 out of the 26 analysts surveyed had expected no rate change. STANLIB expected rates to be cut by 50bps. The Reserve Bank last adjusted interest rates in March 2010, when they surprised the market with a 50bps reduction. The prime interest should now fall to 9.5%, which is the lowest prime rate South Africa has experienced since 22 January 1981. The prime rate was cut to 9.5% on 16 August 1979 and stayed at that level until early 1981.
The next MPC meeting is on 17/18 November 2010, which is the last meeting of the year.
In making the decision to cut rates, the Reserve Bank highlighted the following changes to economic conditions since the last MPC meeting in July 2010:
- Inflation has surprised on the downside, and the Reserve Bank has reduced its own inflation forecast
- The growth momentum in the domestic economy has slowed, with SA expected to grow well below potential
- The global economic outlook remains depressed with some concerns about deflation
Economic conditions have changed since the last MPC meeting in July 2010 and the Reserve Bank has used the opportunity to cut rates further, thereby providing further stimulus to the economy. In total, the Reserve Bank has now cut rates by 600bps since December 2008, which is significant in the context of SA interest rate history. Interest rates are now at 30-year lows.
In value terms, using a house value of R1 000 000, and a 20-year mortgage, the 600bps reduction in interest rates since end 2008 would have reduced the home loan repayment by an excess of R4 300 a month. Over the past 18 to 24 months, there has been a very significant downward adjustment to the cost of debt.
There are some upside risks to inflation (mainly wages, some administered prices and international food prices), but these risks remain well contained and the Reserve Bank remains very comfortable that inflation can stay within the target range to the foreseeable future.
In the MPC statement released yesterday the Reserve Bank clearly indicated that the "scope for further downward movement in rates is seen to be limited". While a further rate cut cannot be entirely ruled out, the current inflation forecast coupled with the growth projections would suggest that this is now the bottom of the SA interest rate cycle.
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