Surprise Rate Cut - 14th Aug 2009

The South African Reserve Bank's (SARB's) Monetary Policy Committee (MPC) on Thursday decided to cut the repo rate by 50 basis points to 7.0%. This is out of line with consensus expectations in the marketplace of an unchanged rates stance.

SARB Governor Tito Mboweni said that notwithstanding upside cost pressures, adverse economic conditions tilt the risk to inflation to the downside.

Mboweni said that the committee as usual deliberated at some length and it was "very closely debated", but at the end of the process the cut was agreed on as communicated.

"We had quite a long debate about what to do," said Mboweni.

Mboweni says the outlook for the international economy appears to have improved according to reports and there is cautious optimism that the bottom of the cycle has been reached, but the recovery will not be uniform across countries or regions.

Clearly, he added, the exchange rate has been of some assistance in the attainment of lower inflation in the country.

He says the bank's consumer inflation (CPI) forecasts are more or less unchanged, with CPI inflation expected to continue it moderate downward trend and enter the target band in the second quarter of 2010 and remain within the range until end 2011.