Marcus springs surprise rate cut

The Reserve Bank unexpectedly cut the repo rate (interest rate) by half a percentage point yesterday, taking its key lending rate to 6,5%, its lowest for nearly three decades.

Lower inflation, subdued economic growth and the negative effect of gains in the rand played a role in the decision of the monetary policy committee (MPC), which took markets by surprise.

However, Bank governor Gill Marcus took pains to dispel speculation that the rate cut was prompted by a clarified mandate letter from Finance Minister Pravin Gordhan last month.

The letter spelled out a range of factors considered by the Bank when it sets interest rates, making clear that it focuses on growth and employment, as well as inflation.


“The mandate clarifies what is expected of us from the government … it’s not something new,” Marcus told reporters in reply to a question.

“These issues have always been considered by the MPC. The mandate enables us to be held accountable in a certain way, but is not a reason for the decision.”

The rand weakened 1,5% to R7,46 to the dollar in response to the rate cut but government bonds rose, which signalled markets were comfortable with the outcome.

“The improved inflation environment has provided some space for an additional monetary stimulus to reinforce the sustainability of the upswing without jeopardising the achievement of the inflation target.”

Inflation was now expected to sink to a low point of 4,9% in the third quarter of this year — well inside the official 3%-6% target range. Falling food prices were putting downward pressure on inflation and there was clarity over electricity tariffs, seen as the biggest inflation threat at the last MPC meeting in late January.

The Bank revised its forecast for economic growth this year up to 2,6% from 2% then, but said this was “nevertheless still low”.

“While an appreciated rand exchange rate is a positive factor in the inflation outlook, an excessively strong exchange rate is a cause for concern,” the MPC statement said. At recent levels, the rand may add to constraints in the economic recovery, it said. The rand had appreciated about 3% to the dollar and 6% against a trade-weighted basket of currencies monitored by the Bank since its previous MPC meeting.




Business leaders and trade unions welcomed the decision, which leaves room for debate on whether political pressure and the clarified mandate played a role.

Source: Business Day