Interest rate cut by 50 basis points – lowest home loan rates in 30 years

Nov. 19, 2010 - PRLog -- The SA Reserve Bank (SARB) has cut the repo rate by 50 basis points to 5.5 percent, governor Gill Marcus said on Thursday.

Standard Bank and Nedbank have already announced that their prime rate would now fall to nine percent, in line with banks’ traditional responses to repo rate changes.

This was the lowest it had been in 30 years. Marcus told a media briefing.

She emphasised that when making its decision on rates, the Monetary Policy Committee’s (MPC) focus is on the “situation that might exist 12 to 18 months hence”. The MPC found the risks to the longer term inflation outlook to be “fairly evenly balanced”.

“The domestic economic recovery remains fragile, and the adverse global developments make the growth outlook more uncertain,” she said.

“The view of the MPC is that there is room for further stimulus, given the weakness in the supply side of the economy.”

The decision to lower rates was based on various factors, including an improved outlook for domestic inflation.

“Since the previous meeting of the Monetary Policy Committee (MPC), the outlook for domestic inflation has improved further against the backdrop of a continued negative domestic output gap and sustained strength in the exchange rate of the rand,” said Marcus.

The governor said they expected an average inflation rate of 4.3 percent for 2010. This fell within the target range of three to six percent.

“Inflation is then expected to remain at an average of 4.3 percent in 2011 and to increase to 4.8 percent in 2012,” she said.

Marcus said the main risks to inflation included rising wages, and increasing food and petrol prices.

“Global food prices have been affected by adverse weather conditions in a number of regions, but the impact on domestic prices has been counteracted in part by the rand exchange rate trends and the bumper maize crop.

“The exchange rate has also moderated domestic petrol price increases.”

Marcus said the global economic recovery “has continued in an uneven manner”.

There were risks to the growth of advanced economies including the US, Japan and the euro area.

“The recent resumption of quantitative easing, against a backdrop of deflation fears, indicates that monetary policy in the US is likely to remain highly expansionary for some time.”

Quantitative easing refers to a strategy of the US Federal Reserve to inject money into the US economy to make borrowing cheaper so that more people and companies can access cash, then spend it and thus stimulate the economy.

Marcus also highlighted concerns about Europe, particularly about whether solvency of the Irish banking system and the sustainability of Irish public sector deficits could affect the rest of Europe or even have a global effect.

“Apart from the risks to the fragile global recovery, there are also significant risks to financial stability emanating from these developments in the advanced economies.”

These risks included the risk of a sudden reversal of capital flows to emerging markets.

“The quantitative easing has continued to have spillover effects on emerging market economies.

“The search for yield resulting from this increase in liquidity has implications for the exchange rates of the recipient countries. South Africa has been no exception in this respect and appreciation pressures are expected to persist for some time, in the absence of renewed bouts of global risk aversion.

“The exchange rate therefore remains a downside risk to the inflation outlook.”

Marcus said that since the previous MPC meeting, the rand had appreciated by over three percent against the US dollar. ”This has been despite lower domestic interest rates and the higher pace of reserve accumulation in the past two months.” The outlook for domestic growth remained subdued.

“The forecast of the Bank is relatively unchanged since the previous meeting of the MPC, with GDP growth remaining at 2.8 percent for 2010 and expected to average 3.3 percent and 3.6 percent in 2011 and 2012 respectively.” – Sapa

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