Johannesburg - Facing a doggedly subdued economy, South Africa's central bank surprised markets with a 50 basis point cut on Thursday after recent bleak data pointed to a longer and deeper recession than previously thought.
The reduction may quell criticism from trade unions - which have recently won above-inflation wage settlements - although it falls short of their demand of a 200 basis point cut, with the central bank repeatedly vowing it will not bow to any outside pressure.
The latest rate decision brings the bank's lending rate to a four-year low of 7.0% and total cuts since December to 5 percentage points, unwinding rate hikes made between June 2006 and June 2008.
The central bank in June paused a monetary loosening cycle it started in December, citing sticky inflation and most analysts had suggested it would wait for clear evidence inflation was cooling before cutting again.
However, inflation did slow more than expected in June and recent data shows consumer spending and factory and mining output continues to fall.
The economy is seen contracting again in the second quarter, after a 25 year record decline of 6.4% in the first three months of the year.
Data this week reinforced the gloom.
Factory output continued its heavy decline with a 17.1% annual drop in June, mining output declined again and retail sales contracted a more than expected 6.7%.
Together, those three sectors make up a third of GDP.
Central Bank Governor Tito Mboweni warned the economy appeared to be lagging a global recovery.
"The monetary policy committee is of the view that 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."
Targeted consumer inflation was seen in the 3% to 6% target band in 2010. Headline CPI slowed to 6.9% year-on-year in June.
Government bonds rallied after the decision and the rand weakened, with most investors expecting no change in the repo.
Mboweni said while wage increases and electricity prices still posed a risk to the inflation outlook, the economy remained constrained by weak global and domestic demand.
"Domestic economic conditions remain very much subdued amid indications that the economy contracted again in the second quarter of 2009," he said.
Last cut
Trade unions reached an agreement with power utility Eskom
on Thursday to avert what could have been a damaging strike after workers agreed to a 10.5% pay rise, far above the inflation rate.
Mboweni said wage increases were a risk to the inflation outlook but were countered by the impact from weak demand on prices.
The Eskom deal may signal the end of a series of strikes, and although pay deals all beat inflation, monetary authorities may now have a clearer picture of their impact on inflation.
Only three of the 26 economist polled by Reuters last week saw the Reserve Bank cutting the repo rate by 50 basis points, with 23 forecasting rates would be left unchanged.
Analysts said the latest rate cut could be the last with inflation still outside the target range.
"It was always going to be a close call between no change and a cut, and the growth side of the argument won the day," said Johan Rossouw, chief economist and strategist at Vunani Securities.
"I believe it might have been the last cut in the cycle, although you never know."
Second quarter growth data will be released on Tuesday.
But with manufacturing and mining output continuing to fall by double-digit rates and retail spending also depressed, some economists suggested there was scope for more cuts this year.
"We are still expected to grow below potential at least over the next two years, we are still expecting one further cut this year possibly in September or October, by then the economic data will still look fairly weak," said Carmen Altenkirch, economist at Nedbank.
- Reuters