South Africa Unexpectedly Cuts Interest Rate to 7%

By Nasreen Seria and Ron Derby

Aug. 13 (Bloomberg) -- South Africa’s central bank unexpectedly cut its benchmark interest rate by half a percentage point, the sixth reduction since December, to curtail the economy’s first recession in 17 years.

The repurchase rate was lowered to 7 percent, Governor Tito Mboweni said in a televised speech from Pretoria today. Only three of 27 economists surveyed by Bloomberg predicted today’s decision, while the rest expected the rate to be left unchanged.

The Reserve Bank resumed cutting its benchmark rate, after keeping it unchanged at the last Monetary Policy Committee meeting in June, as manufacturing data showed the economy may have contracted for a third consecutive quarter in the three months through June. The bank also has room to lower interest rates after the inflation rate fell to a 22-month low of 6.9 percent in June.

“This recession is turning out to be a little deeper and a little longer than we had expected,” said Colen Garrow, an economist at Brait SA in Johannesburg who forecast today’s rate cut. “Extraordinary times call for extraordinary measures. Inflation is going to take care of itself.”

The rand was at 8.0688 against the dollar as of 3:43 p.m. in Johannesburg from 7.9840 before Mboweni began speaking. The yield on the R157 government bond, due 2010, fell 8 basis points, or 0.08 percentage point, to 8.29 percent.

Recession

Manufacturing, which accounts for 15 percent of the economy, plunged an annual 17 percent in June, the same decline as the previous month, the statistics office said on Aug. 11. Retail sales fell for a fifth consecutive month in June, dropping 6.7 percent from a year ago, Statistics South Africa said yesterday.

“It is likely that the domestic economy contracted in the second quarter of this year,” Mboweni said. “The domestic economy remains constrained by weak global and domestic demand.”

Gross domestic product fell an annualized 6.4 percent in the second quarter, the biggest drop in almost 25 years. The statistics office will publish second-quarter GDP data on Aug. 18.

Mboweni has faced growing pressure from labor unions to continue cutting interest rates to help curtail the recession and ease job losses. The Congress of South African Trade Unions, the country’s biggest labor federation, called for a 2 percentage point rate cut today.

Inflation Outlook

Most economists expected the central bank to keep the benchmark interest rate unchanged as wage demands of as much as 15 percent threatened to boost inflation. Eskom Holdings Ltd., the state-owned power utility that increased electricity tariffs by 31 percent this year, agreed on Aug. 8 to increase employees’ pay by 10.5 percent.

That has been partly offset by the rand’s 32 percent surge against the dollar since March, helping to ease import costs.

Inflation will probably ease into the target by the second quarter next year and remain there until the end of 2011, Mboweni said. The main risks to inflation are from “cost-push pressures” such as rising oil and electricity costs, he added.

“Notwithstanding upside cost pressures, the adverse economic conditions appear to tilt the balance of risks to the inflation outlook towards the downside over the medium term,” the governor said.

Mboweni, 50, will leave the Reserve Bank in November after more than a decade as governor. He will be replaced by Gill Marcus, a former deputy central bank governor and most recently chairwoman of Absa Group Ltd., the country’s biggest retail bank.

To contact the reporters on this story: Nasreen Seria in Johannesburg nseria@bloomberg.net; Ron Derby in Johannesburg at rderby1@bloomberg.net
Last Updated: August 13, 2009 09:46 EDT

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