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South Africa central bank cuts prime rate unexpectedly to 7%

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South Africa’s central bank unexpectedly cut its benchmark interest rate by half a percentage point, the sixth reduction since December, to curtail the economy’s first recession in 17 years.

The repurchase rate was lowered to 7 percent, Governor Tito Mboweni said in a televised speech from Pretoria today. Only three of 27 economists surveyed by Bloomberg predicted today’s decision, while the rest expected the rate to be left unchanged. The bank has cut the rate by 5 percentage points since Dec. 11.

The Reserve Bank resumed cutting its benchmark rate, after keeping it unchanged at the last Monetary Policy Committee meeting in June, as manufacturing data showed the recession may have extended into the second quarter. The call to reduce rates was a “very closely debated one,” Mboweni said, indicating the MPC may have been split in its decision as rising energy and wage costs threaten to keep inflation above the 3 percent to 6 percent target range.

“A welcome decision in the light of the strain that is still evident in the real economy,” said Elize Kruger, an economist at KADD Capital in Johannesburg. “However, given that we have probably reached the lower turning point in economic growth in the first quarter, this could have been the last cut in this cycle.”

The rand was at 8.0277 against the dollar as of 5:05 p.m. in Johannesburg from 7.9840 before Mboweni began speaking. The yield on the R157 government bond, due 2010, fell 9 basis points, or 0.09 percentage point, to 8.28 percent.

Recession

Manufacturing, which accounts for 15 percent of the economy, plunged an annual 17 percent in June, the same decline as the previous month, the statistics office said on Aug. 11. Retail sales fell for a fifth consecutive month in June, dropping 6.7 percent from a year ago, Statistics South Africa said yesterday.

“It is likely that the domestic economy contracted in the second quarter of this year” though at a slower rate than in the previous three months, Mboweni said. “The domestic economy remains constrained by weak global and domestic demand.”

Gross domestic product fell an annualized 6.4 percent in the second quarter, the biggest drop in almost 25 years. The statistics office will publish second-quarter GDP data on Aug. 18.

‘Extraordinary Times’

“This recession is turning out to be a little deeper and a little longer than we had expected,” said Colen Garrow, an economist at Brait SA in Johannesburg who forecast today’s rate cut. “Extraordinary times call for extraordinary measures.”

Mboweni, who will leave the Reserve Bank in November, has faced growing pressure from labor unions to cut interest rates to help curtail the recession and ease job losses. The Congress of South African Trade Unions, the country’s biggest labor federation, called for a 2 percentage point rate cut today.

Most economists expected the central bank to keep the benchmark rate unchanged as wage demands of as much as 15 percent threatened to keep inflation above the target range. Eskom Holdings Ltd., the state-owned power utility that increased electricity tariffs by 31 percent this year, agreed on Aug. 8 to increase employees’ pay by 10.5 percent.

“I find it more and more difficult to read the signals from the Reserve Bank,” Dawie Roodt, chief economist of Efficient Group in Pretoria, said in a televised interview. “Their primary job is to make sure that inflation is low. They have been missing that for the past two years.”

Inflation Risk

While the main risks to inflation are from “cost-push pressures” such as rising oil and electricity costs, the Reserve Bank expects inflation to continue its “moderate downward trend,” Mboweni said. The inflation rate, which fell to a 22-month low of 6.9 percent in June, will probably drop into the target range by the second quarter of 2010 and remain there until the end of 2011, he added.

The inflation outlook is also being aided by lower food prices and the rand’s 32 percent surge against the dollar since March, which has curbed import costs.

“We are fairly confident that inflation will go below 6 percent in the next few months” based on the rand’s appreciation and current trend in oil prices, Bertus van Zyl, a member of the Monetary Policy Committee, said in a televised interview with South African Broadcasting Corp. today. Recent data show the economy “remains in a fairly deep recession.”

Mboweni, 50, has been governor at the central bank for more than a decade. He will be replaced by Gill Marcus, a former deputy central bank governor and most recently chairwoman of Absa Group Ltd., the country’s biggest retail bank.

Source: Bloomberg

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