Reserve Bank governor Tito Mboweni announced on Thursday that the Monetary Policy Committee (MPC) had agreed to lower the repo rate by 50 basis points to eight per cent.

Reserve Bank governor Tito Mboweni announced on Thursday that the Monetary Policy Committee (MPC) had agreed to lower the repo rate by 50 basis points to eight per cent.

The announcement capped off a remarkable year for local interest rates and brought the total amount of rate cuts to 550 basis points since the year’s first cut was announced in June.

However, in light of the June and October MPC meetings, many South African economists expected the cut to equal 100 basis points. The SA Reserve Bank (SARB) cut basis points by 150 in June and October.

In June, the Reserve Bank got the ball rolling when it cut the repo rate by 1,5 per cent. It reduced the rate again in August, September and October.

Before the June cut the MPC last announced cuts in September 2001, when the monthly average exchange rate was 8,64 rand per dollar. The MPC move then meant that the prime rate dropped to 13 per cent. Four interest rate hikes last year saw the prime rate at 17 per cent for the first half of this year.

The 400 basis points increase in 2002 was in response to the collapse of the rand from 9,79 rand per dollar on November 29, 2001, to 13,86 on December 20, 2001.

The rand then reversed course and was the best performing currency against the dollar in 2002 and in the first 11 months of 2003. The rand reached a best level so far this year of 6,09 on December 3, its best level since January 2000. The last time it was below 6 rand per dollar was in October 1999.

The 30 per cent strengthening in the Rand since January has significantly eased inflationary pressure on the local economy. This has brought inflation well within the Reserve Bank’s targeted three to six per cent levels and has given the Reserve Bank the confidence to cut interest rates to their current levels.

Despite a total of 500 basis points worth of cuts since June 12, the trade-weighted rand strengthened by 24 per cent between June 12 and December 4.

Whilst many economists have cautioned against rate cuts possibly weakening the rand, few will argue that today’s rate cut will have a dampening effect on the rand. Already this week the rand has lost some ground against the dollar on the market’s expectation of a 0,5 per cent rate cut.

Many economists agree that interest rates are unlikely to come down much further from these levels.

Original article from Car