Comment from Momentum - South African Reserve Bank Monetary Policy Committee Decision

The decision by the South African Reserve Bank Monetary Policy Committee (MPC) to reduce the repurchase (repo) rate by 50 basis points to 6.5 per cent per annum is a welcome development that should positively affect South Africa’s economic recovery process. The repo rate has been constant at 7 per cent per annum since August 2009. Today’s decision was not anticipated by several economists who felt that the repo rate would remain unchanged. Arguably, the economic recovery currently underway at the global and domestic level, weakens the case for stimulus through monetary policy.

According to the statement of the MPC, a primary contributor to this decision is that the headline Consumer Price Index (CPI) annual inflation rate fell into the target range of between 3 per cent and 6 per cent sooner than anticipated. The headline CPI annual inflation rate for February 2010 was 5.7 per cent. Other factors that have contributed to the rate cut are the high level of household debt, substantially tighter credit conditions and the stronger rand. Furthermore, the weak recovery path in developed countries means that imported inflation is currently a minor threat.

One concern over the rate cut is what lower interest rates mean for savers. A welcomed positive development of the recent recession has been the increase in gross saving measured as a percentage of GDP. In 2009, this ratio stood at 15.3 per cent, the highest level since 2003. Although negative factors led to this increase in saving (low consumer confidence, a decline in expenditure and a sharp contraction in credit), it is a positive development that should be encouraged. However, lower interest rates reduce the return on these savings and may discourage future saving.

The relief that the rate cut provides to households should partially offset the impact of higher fuel and electricity prices. Over the medium term, it is expected that consumption expenditure will strengthen further and that there will be an improvement in both credit demand and supply.