Pretoria – The SA Reserve Bank’s decision to cut lending rates to the lowest levels since 1974 has been roundly welcomed and sparked a rally in the rand.
The Monetary Policy Committee cut the repo rate by 50 basis points to 6.0%, citing a softer economic growth outlook and worries about above-inflation wage rises.
The move brings interest rate reductions since December 2008 to 600 basis points.
"The bank's forecast of GDP growth has declined moderately since the previous meeting of the MPC, with growth now expected to average 2.8% in 2010 and 3.2% in 2011," the bank said in its statement.
The bank's previous forecast was at 2.9%.
Household spending, a key driver of economic previously, was expected to be constrained by high levels of indebtedness and unemployment.
The Reserve Bank said inflation was largely contained and was seen reaching an average 3.7% in the third quarter of 2010 and measure 5.1% by the final quarter of 2012, well within the bank's target of between 3% and 6%.
Based on the central bank’s downbeat comments on the economy, some economists expect another interest rate cut this year.
The rate cut was widely welcomed, with trade union Solidarity saying that it was "a boost to South Africans' morale".
"The disillusionment brought about by the recession was largely postponed in South Africa due to the euphoria surrounding the Soccer World Cup," the union's deputy general secretary Dirk Hermann said.
"Furthermore, the average South African family experiences increased financial pressure in the second half of the year just before the start of the Christmas season."
Business Unity SA (Busa) also said it was the right decision.
"While a further cut in interest rates will not in itself create a stronger economic recovery, it helps to strengthen consumer and business confidence at an important stage in the business cycle."
The organisation said it believed that the growth outlook remained modest and on present economic evidence the growth rate might not even reach 3.0% for 2010 as a whole.
House prices
Property industry leaders welcomed the cut, but said more was needed to jump-start house prices.
Seeff Property Services chairperson Samuel Seeff said that while the cut was expected, he would have liked to have seen a "bolder" approach.
"A cut of 75 basis points or even 1.0% as a boost to the economy."
However, this issue was not as significant to the market as the banks' approach to lending.
"If we are going to have any sort of kick-start to the property market, it will come about as a result of banks reducing their criteria in terms of approving loans."
Seeff said the interest rate was not the factor that was holding the market back, it was the banks.
"We are not even talking about 100% loans to value bonds being rejected. There are people prepared to put in equity, and the banks are still not approving them."
If banks could start to relax their criteria, this would begin getting the market going, and would be of benefit to all, Seeff said.
Market reaction
After the rate cut, the rand firmed to 7.1649, nearing key resistance at 7.15 to the dollar. Any breach of that would open up the way for a test of the psychologically key 7.00 to the dollar.
"(The rand's strength) has more to do with the sentiment. The statement of the MPC was concerned about further growth. It looks like if things carry on like they are the scope for further reductions down the line increases," said Ion de Vleeschauwer, chief dealer at Bidvest Bank.
"The rate cut is positive for economic growth in the country. It will attract investment despite (the fact) that the carry has diminished," he said, forecasting a 7.10-7.30 range for the rand against the dollar next week.
Government bonds rose sharply, continuing the trend of recent weeks that was partly driven by rate cut expectations.