S.African central bank cuts rates, warns on growth

South Africa’s central bank cut its repo rate by 100 basis points on Thursday and painted a gloomy economic picture, with credit and producer inflation numbers supporting further rate cuts.

South Africa’s economy may already be languishing in its first recession in 17 years in the wake of a worldwide economic slump that has knocked manufacturers and hit mining output.

The central bank cut the repo rate to 8.5 percent, the lowest level since October 2006. Governor Tito Mboweni said all the signs were pointing to a second quarter of contraction in the first quarter of 2009.

“The outlook for domestic economic growth remains subdued, with no indications of a quick recovery,” he said in a televised statement.

“The high frequency data continue to suggest that the negative conditions recorded in the final quarter of 2008 persisted in the first quarter of 2009.”

Africa’s biggest economy shrunk by 1.8 percent in the fourth quarter of 2008 and weak manufacturing and mining output numbers point to another contraction.

The central bank has shifted its focus to tackling ailing growth, with inflation still above the 3-6 percent target.

Mboweni said although the near-term inflation outlook had deteriorated, it was expected to follow a downward trend and average 5.4 percent at the end of the forecast period in the final quarter of 2010.

Statistics South Africa data earlier in the day showed producer inflation slowed sharply to 5.3 percent in the year to March, coming a day after consumer inflation for the same period braked slightly to 8.5 percent.

AGGRESSIVE RATE CUTS

Consumer inflation, which was partly fuelled by debt-driven spending, has trended downward since it peaked in August 2008.

Mboweni said consumer demand remained depressed and could be restrained further by falling house prices and weak asset markets.

Household spending was likely to remain under pressure after other data showed annual growth in demand for credit by the private sector was at a 4-1/2 year low in March at 8.51 percent.

With inflation on a downward trajectory and most indicators pointing to a weak economy, analysts said there was room for another big rate cut in May.

“The SARB’s admission that the economy is clearly in recession … suggests that we are in line for another 100 basis points rate cut at the May MPC meeting,” said Razia Khan, regional head of research for Africa at Standard Chartered.

Next month’s rate decision will come two days after the release of the first-quarter growth figures.

“While most people, us included, are looking for a small negative year-on-year GDP print, we think a reading of a more severe slowdown could well prompt a 100 basis point cut,” said Peter Attard Montalto, emerging market economist at Nomura.

But the central bank’s executive general manager, and policy committee member, Bertus van Zyl told broadcaster SABC in an interview the MPC starting cutting in smaller steps.

“Starting from December we’ve come down by 350 basis points, that is a fairly significant move. I’m not saying further moves are not possible. One must assume at some point we may start moving by 50 basis points and at some point not at all.”

Also taking pressure off the central bank was March trade data, which showed a second month of relatively small deficits, an encouraging sign for the current account deficit.

The South African Revenue Service said the gap stood at 512 million rand, in line with February’s shortfall but well below the record 17.4 billion rand deficit in January.

Both imports and export rose, surprising analysts expecting a deterioration in trade activity due to the global downturn.

An improvement in the current account may further support the rand, already boosted by a return of risk appetite globally and easing political uncertainty at home. It touched 8.42 to dollar — its strongest level since early October.
The central bank said if sustained, rand strength would reduce the upside risk to the inflation outlook.

Reuters.