The SA Reserve Bank (SARB) has cut the repo rate by 50 basis points to five percent, governor Gill Marcus said on Thursday.
The prime rate would decline to 8.5 percent.
“While it is recognised that such a move on its own will not overcome the challenges facing the economy, it is felt that it can help alleviate some of the pressures faced by some sectors,” Marcus said in Pretoria.
The interest rate cut follows nine consecutive Monetary Policy Committee (MPC) meetings where the repo rate remained unchanged at 5.5 percent, after it was reduced by 650 basis points between mid-2008 and November 2010.
The SARB determines the interest rate based on its mandate to keep inflation within a target of between three and six percent.
Year-on-year consumer price inflation was 5.5 percent for June while producer price inflation was 6.6 percent in May.
Marcus said domestic inflation was expected to remain within its target range until 2014.
“Inflation is expected to average 5.6 percent in 2012, and 5.1 percent in both 2013 and 2014.”
Since the previous MPC meeting in May, the global economy was showing more signs of a generalised slowdown.
Marcus said there had been no meaningful progress in resolving the Eurozone crisis, the US economic outlook had deteriorated, and emerging markets including China, India and Brazil, were feeling the spill-over effects.
South Africa’s economic growth was under threat by these global developments and deteriorating domestic business and consumer confidence.
“The negative spill-over effects to South Africa are likely to intensify.”
The SA Reserve Bank had revised South Africa’s economic growth forecast of 2.9 percent for 2012 down to 2.7 percent, and predicted growth of 3.8 percent in 2013.
Globally, rising inflation was not seen as an immediate threat.
“Global inflation continues to be benign given the slowing growth prospects and lower commodity prices.
“One area of risk to the inflation outlook emanates from the higher grain prices in response to the continuing drought in the United States,” Marcus said.
However, the local inflation environment had improved somewhat. Any risks of rising inflation from increasing food and energy prices could be offset to some extent by lower global commodity prices.
If the economy was to show a sustained increase in output, it would need a concerted and co-ordinated effort from both government and the private sector, Marcus said.
Since mid-2008, the interest rate had been at its lowest level in 30 years. –
Article by Gillian Jones, Sapa