Repo looks ripe for rate cut

Johannesburg - The Reserve Bank will likely cut its repo rate by 50 basis points to 6.0% on Thursday.

Analysts see a 60% chance of a rate cut, and 40% probability of rates remaining steady.

Nineteen out of 23 economist polled by Reuters expected the central bank to cut its the repo rate this week, with only four forecasting a no-change stance.

Repo rate cut

The economy needs another boost because the recovery is fragile and inflation has eased to a four-year low and is likely to remain within the central bank's 3% to 6% target of the for the next 18 months, leaving room for an interest rate cut.

The central bank has cut the repo rate by 5.5 percentage points between December 2008 and March 2010.

"Recent data may well be labelled as key, but we believe when combined with a worsening international outlook and markets strongly pricing in a cut that the SARB will find itself in a situation where it has to reduce rates by 50 basis points," said Peter Attard Montalto, emerging markets analyst at Nomura.

SARB governor Gill Marcus on Thursday said the central bank's mandate is wider than inflation targeting and it does consider growth when deliberating on rates.

Also arguing for a rate cut is the rand currency, which advanced to a new two-and-a-half-year high of 7.1527 against the dollar on Friday.

At its last meeting in July, the Monetary Policy Committee said it was "aware" of the impact of the volatility of the currency on exports and importing-competing sectors.

Manufacturers have cited the rand as a key constraint, with lower exports in the first quarter contribute to a wider deficit in the current account.

Repo rate steady

Some analysts said although the economy slowed to 3.2% in the first quarter, another rate cut would hardly make a difference and the central bank should wait it out.

"The SARB has eased the repo rate by 550 basis points in total. If this hasn't done much to stimulate the economy, then another 50 basis points won't help either," said Maureen Mashiane, economist at the Public Investment Corporation.

"It would be best to leave rates unchanged and maintain the flat stance for more than a year rather than to cut in September and have to start tightening early."

The repo rate is already at its lowest in three decades.

Market reaction

Government bonds have firmed significantly in the past month, partly on expectations of further monetary easing in September.

Bonds may firm slightly if the central bank cuts rates, although some dealers have said bonds are becoming slightly expensive at current prices.

The rand may retreat if rates are reduced, but only slightly because South African returns are still much more attractive for investors than those in other developing markets.