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South Africa's flag. (Photos.com)
South Africa's flag. (Photos.com)

South Africa cuts rates to 5 per cent Add to ...

The South African Reserve Bank cut interest rates by 50 basis points on Thursday in a surprise move intended to bolster flagging growth as the euro zone crisis weighs heavily on Africa’s largest economy.

South Africa’s recovery from the 2008-09 recession has been lacklustre as the country suffers from the double whammy of low business confidence and policy uncertainty at home and the effects of Europe’s woes. South Africa is the most exposed sub-Saharan African nation to Europe as about a third of its manufactured exports are shipped to the continent.

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Gill Marcus, the central bank governor, said that while it was recognized that cutting the repurchase rate from 5.5 per cent to 5 per cent would not overcome the challenges facing the economy, “it is felt that it can help alleviate some of the pressures faced by some sectors”.

“The problems in the euro zone are likely to persist for a protracted period and since the previous [Monetary Policy Committee] meeting the negative growth outlook has spread beyond Europe, in particular to the US, China, India and other emerging market economies,” Ms. Marcus said after the MPC met. “The negative spillover effects to South Africa are likely to intensify. This unfavourable outlook is reinforced further by the fragile domestic private sector investment and consumption trends.”

Sarb, the central bank, had held interest rates at 5.5 per cent, a 30-year-low, for more than a year, as it sought to balance concerns about inflationary pressures with the gloomy growth outlook, while other countries such as Brazil, China and India cut rates.

The economy is forecast to grow by about 2.7 per cent this year, well below the level the country needs to address unemployment of about 25 per cent, a figure that doubles for youth joblessness, poverty and inequality. Concerns about inflation have, however, receded in recent weeks, with the consumer price index in urban areas falling to 5.5 per cent in June from 5.7 per cent the previous month. Ms. Marcus said inflation would continue to fall and was expected to reach a low of 4.9 per cent in the second quarter of 2013.

Kevin Lings, chief economist at Stanlib, a South African asset management house, described the rate cut as an attempt at “damage limitation.”

“I think there’s quite a big shift in the tone of the statement . . . now there’s a massive de-emphasis of any inflation risks and a huge uplift in discussions around what the world economy is now doing to South Africa,” Mr. Lings said.

“There is also emphasis on other countries cutting rates and they may feel they are a little behind in terms of the general global reaction to the renewed slowdown in the world economy.”

Copyright The Financial Times Ltd. All rights reserved.

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