South Africa's Reserve Bank unexpectedly cut its benchmark rate to a record low on Thursday, citing a weaker economic outlook and earning rare praise from the government's labour allies who have long demanded monetary loosening to help create jobs.
But Governor Gill Marcus was careful to manage expectations for more cuts that are likely to emerge from the left-leaning allies of the ruling ANC as the party approaches a leadership election at the end of the year.
Striking a decidedly dovish tone as she announced a 50 basis point cut to 5.0 percent in the repo, Marcus said the bank was concerned about the increased risks to domestic growth.
“The monetary policy committee views the prevailing conditions to be appropriate for further monetary accommodation to the economy that will not undermine the inflation outlook,” she said.
Government bond yields fell to record lows and the rand weakened against the dollar after the rate cut.
Powerful labour federation Cosatu, which has accused the Reserve Bank of blindly focusing on inflation targeting at the expense of supporting growth, said Thursday's cut after rates were kept on hold for 19 months was “too little too late”.
“Nevertheless it's a welcome step in the right direction and what we hope is that it isn't just a one-off but reflects a different mindset that they've changed their priorities,” Cosatu spokesperson Patrick Craven told Reuters.
“We hope we will see more reductions which will stimulate growth, create jobs and synchronise the Reserve Bank's policies with those of government departments which are pursuing a much more expansionist, developmental policy.”
But Marcus, known for standing her ground on the importance of an independent central bank, warned interest rate cuts on their own would not solve the country's economic challenges. The bank would continue to act in line with its mandate, which includes keeping inflation within a 3-6 percent band.
“(That) was an interesting political point made by Governor Marcus - that whilst they could provide some further stimulus with a cut at this time it was not a panacea to solve all of South Africa’s problems,” Nomura emerging market analyst Peter Attard Montalto said.
“They clearly want to avoid pressure from civil society and politicians to cut aggressively in a cycle of cuts.”
The Reserve Bank lowered its 2012 growth forecast to 2.7 percent, in line with the Treasury's expectations, from the 2.9 percent seen in May, saying the risks to this forecast were on the downside if there was a more widespread global downturn.
Inflation was expected to continue to moderate over the next few quarters, reaching a low of 4.9 percent in the second quarter of 2013, she added. It was then expected to remain fairly stable around the 5 percent level to the end of 2014.
Twenty-one of 23 economists polled by Reuters last week expected the bank to keep the repo rate, at which it lends to commercial banks, unchanged. Only two saw a 50 basis point cut.
“The big question is whether this is the start of a series of cuts, or whether it's a once-off. But as the governor said, it's all going to be data-dependent,” said Nedbank economist Isaac Matshego.
The Reserve Bank is scheduled to hold two more policy meetings this year, in September and November.
Forward rate agreements, which give an indication of the market's view on future interest rates, indicated a slim chance of another 50 basis point cut later this year.
Prior to Thursday's move, the bank had kept rates steady for 19 months and the majority of economists polled had ruled out a cut this year. - Reuters