Bloomberg News

South Africa Unexpectedly Cuts Benchmark Lending Rate

July 19, 2012

South Africa’s central bank unexpectedly cut its benchmark interest rate by half a percentage point to help bolster the economy as inflation stayed within the bank’s target range.

The repurchase rate was lowered to 5 percent, Governor Gill Marcus told reporters today in Pretoria, the capital. Only two of the 18 economists surveyed by Bloomberg predicted a reduction, with the rest expecting the rate will stay unchanged. The decision was unanimous after a “particularly robust” discussion, she said.

Policy makers cut the repurchase rate for the first time since November 2010, joining central banks in India, Brazil, China and Europe in reducing borrowing costs this year to protect their economies from slower global growth. Marcus was provided the room to ease monetary policy after inflation eased to a 10-month low in June, slowing further from the top end of the 3 percent to 6 percent target range.

“They got so bearish so fast on the spill over of the euro zone economy,” Peter Attard Montalto, an economist at Nomura Plc in London, said in a telephone interview after the decision. “They have clearly been surprised by the downside of inflation and with the external growth worries, that has opened the door for cuts now.”

Slower Growth

Inflation slowed to 5.5 percent in June from 5.7 percent a month earlier, the statistics office said yesterday. At the same time, export demand is coming under pressure amid a debt crisis in Europe, undermining growth in Africa’s biggest economy. The government has cut its forecast for economic growth this year to 2.7 percent, the slowest pace since a recession in 2009. The Reserve Bank also lowered its forecast to 2.7 percent for this year.

“The MPC expects inflation to remain in the target range over the forecast period and sees the risks to the inflation forecast to be relatively balanced,” Marcus said. “In the light of these developments the MPC views the prevailing conditions to be appropriate for further monetary policy accommodation in the economy that will not undermine the inflation outlook.”

Investors began increasing bets two months ago that Marcus would cut rates, driving down yields on forward-rate agreements. The yields on the contracts due in December dropped 37 basis points, or 0.37 percentage point, in the past month to 4.85 percent after today’s announcement.

Standard Bank Group Ltd. (SBK), First National Bank (FNBB), Absa Group Ltd. (ASA) and Nedbank Group Ltd. (NED) cut their prime lending rates to 8.5 percent.

Outlook Threatened

“Despite some moderate employment creation over the past year, the economic growth outlook appears to be threatened by global developments and deteriorating business and consumer confidence,” Marcus said.

Inflation peaked at an average 6.1 percent in the first quarter and will average 5.6 percent this year, less than the previous estimate of 6 percent, Marcus said. Consumer price increases will average 5.1 percent next year, down from a previous forecast of 5.5 percent, she said.

A weaker rand this year is adding to pressure on inflation. The rand has slumped 8.7 percent against the dollar since the beginning of March, the second-biggest drop of 16 major currencies tracked by Bloomberg after Brazil’s real.

The rand weakened 0.4 percent to 8.1959 per dollar at 3:50 p.m. in Johannesburg. The yield on the rand bond due in 2015 dropped 26 basis points to a record low of 5.51 percent.

To contact the reporters on this story: Franz Wild in Johannesburg at; Andres R. Martinez in Johannesburg at

To contact the editor responsible for this story: Andrew J. Barden at

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