S.Africa cbank surprises with rate cut, growth seen slow

Thu Mar 25, 2010 4:34pm GMT

By Stella Mapenzauswa

PRETORIA (Reuters) - South Africa's Reserve Bank shocked markets with a half-point cut in its repo rate on Thursday, a move likely to appease President Jacob Zuma's labour union allies as the economy claws its way back from recession.

The reduction leaves the rate at its lowest level in three decades and adds to 500 basis points of cuts between December 2008 and August 2009, which were aimed at boosting growth after weak demand hit the key manufacturing and mining sectors last year, slashing nearly 900,000 jobs.

"Despite clear signs that the economy has emerged from the recession, the pace of recovery is expected to remain slow," Reserve Bank Governor Gill Marcus told a news conference, announcing a 50 basis point drop in the repo rate to 6.5 percent.

"The improved inflation environment has provided some space for an additional monetary stimulus to reinforce the sustainability of the upswing without jeopardising the achievement of the inflation target."

The rand weakened after the rate cut, and was last at 7.46 from 7.3879 before the announcement. Government bonds rallied, pushing yields lower.

Thursday's rate decision is the first since Finance Minister Pravin Gordhan wrote to Marcus last month, stressing that while the bank's core role was to keep inflation within a 3 to 6 percent target, its mandate allowed more leeway for deviations to account for job losses and economic growth.

Unions that have demanded lower rates applauded the cut.

"This decision reflects a positive interest in the growth of the South African economy as it emerges from the global recession," said trade union federation FEDUSA.   Continued...

<p>South Africa's Central Bank Governor Gill Marcus in a file photo.</p>
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