INDEPENDENT NEWS

Cablegate: South African Reserve Bank Cuts Interest Rate

Published: Thu 18 Dec 2008 02:48 PM
David A Kirby 12/22/2008 10:00:58 AM From DB/Inbox: David A Kirby
Cable
Text:
UNCLASSIFIED
TELEGRAM December 18, 2008
To: SECSTATE WASHDC - ROUTINE
Action: AF
From: AMEMBASSY PRETORIA (PRETORIA 2735 - ROUTINE)
TAGS: BEXP, ECON, EFIN, EINV, EMIN, ENRG, ETRD, KTDB, SF
Captions: USDOC
Subject: SOUTH AFRICAN RESERVE BANK CUTS INTEREST RATE
Ref: None
_________________________________________________________________
Additional Addressees:
CIMS NTDB WASHDC
cc:
DEPT OF COMMERCE WASHDC
DEPT OF TREASURY WASHINGTON DC
SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
Distribution:
TED9594
ACTION AF-00
INFO LOG-00 EEB-00 AID-00 CEA-01 CIAE-00 CTME-00 INL-00
DODE-00 DOEE-00 ITCE-00 DOTE-00 EXME-00 E-00 FAAE-00
UTED-00 VCI-00 FOE-00 FRB-00 H-00 TEDE-00 INR-00
LAB-01 L-00 VCIE-00 NRC-00 NSAE-00 ISN-00 NSCE-00
OES-00 OMB-00 NIMA-00 EPAU-00 GIWI-00 ISNE-00 SP-00
SSO-00 SS-00 STR-00 NCTC-00 FMP-00 CBP-00 BBG-00
EPAE-00 IIP-00 DRL-00 G-00 NFAT-00 SAS-00 FA-00
/002W
------------------0EAC8E 181439Z /38
R 181448Z DEC 08
FM AMEMBASSY PRETORIA
TO SECSTATE WASHDC 6776
CIMS NTDB WASHDC
INFO SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
DEPT OF COMMERCE WASHDC
DEPT OF TREASURY WASHINGTON DC
UNCLAS PRETORIA 002735
DEPT FOR AF/S; AF/EPS; EB/TPP
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND
TREASURY FOR TRINA RAND
DEPT PASS USTR FOR PCOLEMAN
E.O. 12958: N/A
TAGS: ECON EFIN EINV EMIN ENRG ETRD BEXP KTDB SF
SUBJECT: SOUTH AFRICAN RESERVE BANK CUTS INTEREST RATE
1. (U) Summary. The South African Reserve Bank's Monetary Policy
Committee (MPC) reduced the key policy interest rate, the repo rate,
by 50 basis points to 11.5 percent, on December 12, 2008. The rate
cut was made possible by declining domestic inflation and weakening
domestic and international economic conditions. The MPC expects
inflation to return to within the target range of 3-6 percent in the
third quarter of 2009, with the weaker rand as the most significant
upside risk to the inflation outlook. Most analysts believe there
will be further interest rate cuts in 2009. End Summary.
-----------------
Interest Rate Cut
-----------------
2. (U) The South African Reserve Bank's (SARB) Monetary Policy
Committee (MPC) reduced the key policy interest rate, the repo rate,
by 50 basis points to 11.5 percent, on December 12, 2008. This was
the first interest rate cut since April 2005. The MPC explained in
a public statement that its decision was made in view of the
moderating inflation outlook and indications that inflation would
decline further over the coming months.
-------------------------------
Domestic Inflation Developments
-------------------------------
3. (U) Data released by Statistics South Africa (StatsSA) showed
that CPIX inflation (CPI minus mortgage interest) declined from a
high of 13.6 percent in August 2008 to 12.1 percent in November.
Food, fuel and electricity prices were the main contributors to
inflation, despite fuel price reductions in September, October and
November. Producer price inflation also showed signs of moderation
in the past two months. Agricultural food prices declined for the
third successive month in October, when the year-on-year rate
declined to 10.4 percent.
------------------------
Global Economic Slowdown
------------------------
4. (U) According to the MPC's statement, it also took into account
the impact of the global economic slowdown on the South African
economy and inflation. The MPC expects declining commodity prices,
particularly the significant drop in international oil prices, as
well as a decline in the volume of world trade (which has lowered
transport costs) to contribute to downward inflation pressure.
----------------------------
Domestic Economic Conditions
----------------------------
5. (U) The MPC noted that domestic economic conditions have weakened
since the October MPC meeting and that this will contribute to a
more rapid decline in inflation than was initially anticipated.
[Note: GDP growth eased significantly in the third quarter to only a
0.2 q/q annual rate, as the mining, manufacturing as well as retail
and wholesale trade sectors contracted. End Note.]
-----------------
Inflation Outlook
-----------------
6. (U) The MPC's most recent central inflation forecast showed a
further improvement in the inflation outlook from the previous
estimate. Inflation is expected to continue its downward trajectory
and to return to within the inflation target range in the third
quarter of 2009 (previously the second quarter of 2010). Inflation
is expected to average 6.2 percent and 5.6 percent in 2009 and 2010,
respectively. The MPC pointed out that its forecasts were subject
to more uncertainty than usual, given the volatile global
environment, and the uncertainty related to the impact of the
Qenvironment, and the uncertainty related to the impact of the
rebasing and reweighting of the CPI basket to be introduced by
StatsSA in January 2009.
-----------------
Risk to Inflation
-----------------
7. (U) The MPC highlighted the exchange rate as the most significant
upside risk to the inflation outlook. The rand has lost 11 percent
of its value against the dollar and 7.6 percent against the
trade-weighted basket of currencies since the last MPC meeting. The
SARB attributed the depreciation in the value of the rand to risk
aversion prevailing in the current uncertain global environment.
--------------
Local Reaction
--------------
8. (U) The MPC's decision to cut interest rates was welcomed by most
analysts, although some were hoping for a full percentage point cut.
SARB Governor Tito Mboweni told reporters that a more aggressive
move was discussed but not adopted by the MPC because of inflation
risks posed by rand weakness. An ABSA Bank Economist told Embassy
Economic Specialist that the strong deterioration in the global
economy, the slowdown domestically and the decision by numerous
other central banks worldwide to cut interest rates motivated the
decision to cut interest rates. Most economists expect further
interest rate cuts in 2009.
-------
Comment
-------
9. (U) The key focus will now be the pace of the SARB's easing
cycle. The MPC's current inflation forecast as well as slower
growth in South Africa and globally provide a green light for an
accelerated pace of monetary easing in 2009.
BOST
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