SOUTH AFRICAN RESERVE BANK CUTS INTEREST RATE BY ONE

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.

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Interest Rate Cut
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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."

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Domestic Inflation Developments
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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.

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Domestic Economic Slowdown
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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.

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Inflation Outlook
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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.

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Risk to Inflation
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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
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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
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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