Johannesburg - Reserve Bank Governor Gill Marcus said on Thursday an improvement in the economy and inflation outlook has afforded the monetary policy committee (MPC) some space to cut interest rates.
The MPC has cut the repo rate by 50 basis points to 6.5%, with only a few economists expecting a cut.
The prime rate will now drop to 10%.
"Inflation expectations have moderated, inflation has returned
to within the target range and is expected to remain there for the remainder of the forecast period," Marcus said.
She added that the risks to the inflation outlook had
declined somewhat as a result of the continued appreciation of the exchange rate of the rand and greater certainty with respect to future electricity tariff increases.
"Household consumption expenditure is growing at positive,
albeit low rates, but growth in private sector fixed capital
formation remains negative," she said.
The Reserve Bank's CPI forecast indicated an improved inflation
outlook during 2010 and a relatively unchanged outlook for 2011.
"Inflation is expected to average 5.3% and 5.4% in
2010 and 2011 respectively, and to reach a low point at an average of 4.9% during the third quarter of 2010," Marcus said.
She added that there was now greater certainty with respect to
electricity tariff increases after the National Energy Regulator of South Africa's decision to grant price increases to Eskom of 25% per year.
This was in line with the bank's previous assumptions, Marcus
"However, because lower increases were granted to
municipalities, the current forecast makes provision for
electricity tariff increases of 20% during the third
quarters of 2010 and 2011."
She said other factors contributing to the improved expected
inflation trajectory included favourable food price developments as well as lower-than-expected inflation outcomes.