Clash over rate slowdown

Johannesburg - South Africa's central bank cut its repo rate by 100 basis points on Thursday to help boost an economy now in its first recession in 17 years, but warned against further big reductions because of "sticky" inflation.

The latest move was expected by analysts in a Reuters poll and brings the total cuts since December to 450 basis points, taking the repo rate to its lowest level in nearly three years at 7.5%.

The rate move comes after data on Tuesday showed GDP shrank by 6.4% in the first quarter - the biggest fall since 1984 and after a 1.8% contraction in the fourth quarter 2008 - plunging the economy into recession as a global downturn hits manufacturing and mining.

"Recent high frequency indicators suggest that the negative trend in GDP growth is likely to continue during the second quarter of 2009, although at a more moderate pace of contraction," Mboweni said after the central bank's monetary policy committee (MPC) ended a two-day meeting.

Annual CPI, targeted for monetary policy, has been slowing since hitting a peak at over 13% in August, but at 8.4% in April it is still well above the 3% to 6% target band.

Mboweni said the mood in the MPC, which he chairs, was not to make further "significant" cuts in rates.

"Given the kind of stickiness we have seen in inflation outcomes, the mood in the committee is not that of further significant reductions in the repo rate ... we've done all we can," he told a televised press conference after making his announcement.

"Looking at the actions we have taken so far and their full impact going forward you might have a case for saying maybe it's time to pause."

The latest cut comes close to unwinding the 5 percentage points in hikes between June 2006 and June 2008.

Opposition to rate slowdown

But the central bank will come under pressure from business and trade unions to go further.

Stopping now will rile powerful labour federation Cosatu, an ally of the ruling ANC, which said Tuesday's "shocking" GDP data merited a rate cut of at least 200 basis points.

Cosatu said on Thursday that the "minimal" 100 basis points repo rate cut will do little to help with economic recovery in the country.

"The Monetary Policy Committee has let slip an opportunity to kick-start a national campaign to reverse the slide into recession, save jobs and open up the road to recovery," said Cosatu spokesperson Patrick Craven in a statement.

He said the trade union federation was "angry" as the cut would do little to help South Africa escape from "severe economic recession".

"A 200 (basis point) cut could have signalled the beginning of a turnaround."

He said this kind of cut would have assisted companies currently in debt to survive. It would have also helped them save worker's jobs. New businesses would also have an incentive to start up and employ people.

"For individuals with bonds and loan repayments it would release more money to spend on goods and services, stem the decline in demand and provide work for the workers producing those commodities."

However, the reserve bank had "failed" in providing leadership, said Craven.

"It still sees the recession and rising retrenchments as less serious threats to the economy than inflation, which is now clearly on a downward path."

He said the National Union of Metal Workers of South Africa was planning on demonstrating in support of Cosatu's call for a larger repo rate cut and a monetary policy not focused exclusively on inflation targeting.

The federation's central executive committee would meet on June 1 and 2; "and will undoubtedly be looking very sympathetically at the Numsa campaign," said Craven.

Business group Busa also said lower interest rates were necessary to sustain business confidence and minimise job losses.

Some analysts said the next rate move would likely be a 50 basis point cut to 7% in June, before the central bank halted its monetary loosening cycle.

"You'll get a 50 basis point cut in June and then we're probably at a terminal rate, which means we'll end up with a repo rate at 7%, just like we did before interest rates started to rise in the middle of 2006," said Jeff Gable, head of research at Absa Capital.

Despite lingering concerns over inflation, Mboweni said he expected its downward trend in inflation to continue, adding that there appeared to be a moderate improvement in the longer-term inflation outlook.

Data earlier on Thursday showed producer inflation, which has a lagged impact on the consumer number, braked to 2.9% in the year to April from 5.3% in March, suggesting price pressures will ease further.
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