David A Kirby  12/22/2008 10:00:58 AM  From  DB/Inbox:  David A Kirby

Cable 
Text:                                                                                                                                                       
UNCLASSIFIED
TELEGRAM                                        December 18, 2008


To:       SECSTATE WASHDC - ROUTINE

Action:   AF

From:     AMEMBASSY PRETORIA (PRETORIA 2735 - ROUTINE)

TAGS:     BEXP, ECON, EFIN, EINV, EMIN, ENRG, ETRD, KTDB, SF

Captions: USDOC

Subject:  SOUTH AFRICAN RESERVE BANK CUTS INTEREST RATE

Ref:      None
_________________________________________________________________

Additional Addressees:
CIMS NTDB WASHDC

cc:
DEPT OF COMMERCE WASHDC
DEPT OF TREASURY WASHINGTON DC
SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

Distribution:

TED9594
ACTION AF-00    

INFO  LOG-00   EEB-00   AID-00   CEA-01   CIAE-00  CTME-00  INL-00   
      DODE-00  DOEE-00  ITCE-00  DOTE-00  EXME-00  E-00     FAAE-00  
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        /002W
                  ------------------0EAC8E  181439Z /38    
R 181448Z DEC 08
FM AMEMBASSY PRETORIA
TO SECSTATE WASHDC 6776
CIMS NTDB WASHDC
INFO SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
DEPT OF COMMERCE WASHDC
DEPT OF TREASURY WASHINGTON DC

UNCLAS PRETORIA 002735 
 
 
DEPT FOR AF/S; AF/EPS; EB/TPP 
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND 
TREASURY FOR TRINA RAND 
DEPT PASS USTR FOR PCOLEMAN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EMIN ENRG ETRD BEXP KTDB SF
SUBJECT: SOUTH AFRICAN RESERVE BANK CUTS INTEREST RATE 
 
¶1. (U) Summary.  The South African Reserve Bank's Monetary Policy 
Committee (MPC) reduced the key policy interest rate, the repo rate, 
by 50 basis points to 11.5 percent, on December 12, 2008.  The rate 
cut was made possible by declining domestic inflation and weakening 
domestic and international economic conditions.  The MPC expects 
inflation to return to within the target range of 3-6 percent in the 
third quarter of 2009, with the weaker rand as the most significant 
upside risk to the inflation outlook.  Most analysts believe there 
will be further interest rate cuts in 2009.  End Summary. 
 
----------------- 
Interest Rate Cut 
----------------- 
 
¶2. (U) The South African Reserve Bank's (SARB) Monetary Policy 
Committee (MPC) reduced the key policy interest rate, the repo rate, 
by 50 basis points to 11.5 percent, on December 12, 2008.  This was 
the first interest rate cut since April 2005.  The MPC explained in 
a public statement that its decision was made in view of the 
moderating inflation outlook and indications that inflation would 
decline further over the coming months. 
 
------------------------------- 
Domestic Inflation Developments 
------------------------------- 
 
¶3. (U) Data released by Statistics South Africa (StatsSA) showed 
that CPIX inflation (CPI minus mortgage interest) declined from a 
high of 13.6 percent in August 2008 to 12.1 percent in November. 
Food, fuel and electricity prices were the main contributors to 
inflation, despite fuel price reductions in September, October and 
November.  Producer price inflation also showed signs of moderation 
in the past two months.  Agricultural food prices declined for the 
third successive month in October, when the year-on-year rate 
declined to 10.4 percent. 
 
------------------------ 
Global Economic Slowdown 
------------------------ 
 
¶4. (U) According to the MPC's statement, it also took into account 
the impact of the global economic slowdown on the South African 
economy and inflation.  The MPC expects declining commodity prices, 
particularly the significant drop in international oil prices, as 
well as a decline in the volume of world trade (which has lowered 
transport costs) to contribute to downward inflation pressure. 
 
---------------------------- 
Domestic Economic Conditions 
---------------------------- 
 
¶5. (U) The MPC noted that domestic economic conditions have weakened 
since the October MPC meeting and that this will contribute to a 
more rapid decline in inflation than was initially anticipated. 
[Note: GDP growth eased significantly in the third quarter to only a 
0.2 q/q annual rate, as the mining, manufacturing as well as retail 
and wholesale trade sectors contracted.  End Note.] 
 
----------------- 
Inflation Outlook 
----------------- 
 
¶6. (U) The MPC's most recent central inflation forecast showed a 
further improvement in the inflation outlook from the previous 
estimate.  Inflation is expected to continue its downward trajectory 
and to return to within the inflation target range in the third 
quarter of 2009 (previously the second quarter of 2010).  Inflation 
is expected to average 6.2 percent and 5.6 percent in 2009 and 2010, 
respectively.  The MPC pointed out that its forecasts were subject 
to more uncertainty than usual, given the volatile global 
environment, and the uncertainty related to the impact of the 
Qenvironment, and the uncertainty related to the impact of the 
rebasing and reweighting of the CPI basket to be introduced by 
StatsSA in January 2009. 
 
----------------- 
Risk to Inflation 
----------------- 
 
 
¶7. (U) The MPC highlighted the exchange rate as the most significant 
upside risk to the inflation outlook.  The rand has lost 11 percent 
of its value against the dollar and 7.6 percent against the 
trade-weighted basket of currencies since the last MPC meeting.  The 
SARB attributed the depreciation in the value of the rand to risk 
aversion prevailing in the current uncertain global environment. 
 
-------------- 
 
Local Reaction 
-------------- 
 
¶8. (U) The MPC's decision to cut interest rates was welcomed by most 
analysts, although some were hoping for a full percentage point cut. 
 SARB Governor Tito Mboweni told reporters that a more aggressive 
move was discussed but not adopted by the MPC because of inflation 
risks posed by rand weakness.  An ABSA Bank Economist told Embassy 
Economic Specialist that the strong deterioration in the global 
economy, the slowdown domestically and the decision by numerous 
other central banks worldwide to cut interest rates motivated the 
decision to cut interest rates.  Most economists expect further 
interest rate cuts in 2009. 
 
------- 
Comment 
------- 
 
¶9. (U) The key focus will now be the pace of the SARB's easing 
cycle.  The MPC's current inflation forecast as well as slower 
growth in South Africa and globally provide a green light for an 
accelerated pace of monetary easing in 2009. 
 
BOST