R 090913Z FEB 09
FM AMEMBASSY PRETORIA
TO SECSTATE WASHDC 7278
CIMS NTDB WASHDC
INFO SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
DEPT OF COMMERCE WASHDC
DEPARTMENT OF TREASURY WASHDC

UNCLAS PRETORIA 000241 
 
 
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 BY ONE 
PERCENTAGE POINT 
 
¶1. (U) Summary.  The South African Reserve Bank's Monetary Policy 
Committee (MPC) has reduced the key policy interest rate, the repo 
rate, by 100 basis points to 10.5 percent.  The rate cut was made 
possible by declining domestic inflation, which the MPC expects to 
fall within the target range of 3-6 percent in the third quarter of 
¶2009.  Most analysts believe there will be further 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 100 basis points to 10.5 percent on February 5, 2009.  This was 
the biggest single adjustment since October 2003.  It followed a 
50-basis-point cut in December that started reversing a series of 
50-basis-point rate hikes between June 2006 and June 2008 that 
lifted the repo rate by 500 basis points.  The MPC explained in a 
public statement that its decision was made in view of the 
moderating inflation outlook coupled with deteriorating global and 
domestic economic conditions.  The MPC said it "will continue to 
monitor domestic and global developments in order to decide on the 
most appropriate monetary policy stance going forward." 
 
------------------------------- 
Domestic Inflation Developments 
------------------------------- 
 
¶3. (U) Data released by Statistics South Africa (StatsSA) showed 
that CPIX inflation (CPI minus mortgage interest) has been 
moderating consistently since August 2008, when it measured 13.6 
percent.  CPIX had fallen to 10.3 percent by December 2008, and the 
MPC expects a further decline in the January data when the 
reweighting and rebasing of the CPI index implemented by Statistics 
South Africa comes into effect.  Declining international commodity 
prices should also add downward pressure on inflation. 
 
-------------------------- 
Domestic Economic Slowdown 
-------------------------- 
 
¶4. (U) According to the MPC's statement, the domestic economy is 
"adversely affected by the continuing turbulence in the global 
economy and continues to show signs of slowing."  The composite 
leading and coincident business cycle indicators of the SARB point 
to a continuation of this trend.  Recently released economic data 
indicate that prominent sectors such as mining, manufacturing and 
wholesale and retail trade are in recession. 
 
----------------- 
Inflation Outlook 
----------------- 
 
¶5. (U) The MPC's most recent central inflation forecast showed CPI 
inflation averaging 7.5 per cent in the first quarter of 2009, 
thereafter falling within the 3-6 percent inflation target range 
during the third quarter of 2009.  Inflation is then forecast to 
increase again and to breach the upper end of the target range in 
the first quarter of 2010, mainly as a result of technical base 
effects.  Thereafter inflation is expected to return to within the 
target range and remain there until the end of 2010, when it is 
expected to average 5.5 per cent. 
 
----------------- 
Risk to Inflation 
----------------- 
 
¶6. (U) The MPC highlighted the volatile exchange rate as the main 
upside risk to the inflation outlook.  The rand is currently trading 
at levels similar to those that prevailed at the time of the 
previous MPC meeting in December.  The SARB attributed the current 
Qprevious MPC meeting in December.  The SARB attributed the current 
rand level to a stronger U.S. dollar and risk aversion in 
international markets.  The MPC said the risks to the inflation 
outlook posed by oil and food prices appear to have subsided.  Food 
prices continue to moderate at the production price level, while the 
price of oil remains subdued as a result of weakening global growth. 
 
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Local Reaction 
-------------- 
 
¶7. (U) Most analysts welcomed the MPC's decision to cut interest 
rates by more than the usual 50 basis points.   SARB Governor Tito 
Mboweni told reporters that he had suggested slashing rates by 200 
basis points, but that other MPC members convinced him otherwise. 
Analysts said this might indicate that more cuts of similar 
magnitude were likely this year.  A Nedbank economist told Embassy 
Economic Specialist he expects the SARB to aggressively cut interest 
in the first half of 2009, followed by more modest easing in the 
second half. 
 
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Comment 
------- 
 
¶8. (U) Lower interest rates could not have come at a better time for 
South Africa.  Along with heavy infrastructure spending and a weak 
rand that will support greater exports and import substitution, 
lower interest rates will help to prop up demand in a time of 
economic stress.  The combined effect may be enough to keep South 
Africa from falling into negative growth in 2009. 
 
LA LIME