Marcus makes the cut again

Reserve Bank governor Gill Marcus yesterday again did borrowers a favour - but made life even tougher for savers, especially the elderly and other pensioners .

By cutting the repo rate by 50 basis points to 5.5% - its lowest level for about three decades - she extended the rate cuts to 650 basis points since December 2008, and made it 20 consecutive MPC meetings since the repo was last raised, to 12%, in June 2008.

According to Absa, the home loan rate will drop to its lowest since 1974 once commercial banks trim their rates in line with yesterday's decision. At 9%, the prime lending rate will also fall to its lowest level for 36 years.

On a mortgage of R1-million, a home owner's repayments will have fallen by R4500 a month since December 2008.

Yesterday's reduction in the central bank's overnight lending rate is the eighth cut since December 2008 and might be the last one in the current cutting cycle.

Significantly, announcing the reduction, Marcus said the "real" (minus inflation) repo rate was about 1% but hinted that there was limited scope for further cuts, largely because of the strengthening of household spending and credit extension.

Justifying the rate cut, Marcus said "this action is viewed to be consistent with the continued attainment of the inflation target".

Asked if this were likely to be the last cut, she left open a window for downward movement by saying "these are unusual times with rapidly changing information".

With targeted CPI coming in at 3.5% in the third quarter, and expected to remain at that level in the fourth, Marcus and her MPC took their cue for the cut from the rosy outlook for CPI inflation, expected to average 4.3% in 2010, 4.3% in 2011 and 4.8% in 2012.

Add to this prolonged weakness in the supply side of the economy and the cut was predictable.

But the MPC statement also had its usual mentions of risks. The biggest, it said, are wage trends and administered prices. Food prices and fuel prices were "longer-term risks".

Including October's medium-term budget policy statement - which relaxed foreign exchange controls - this is the second recent action in fiscal and monetary policy that the rand has pretty much taken in its stride, despite pressure for the currency to be weakened.

Economist Chris Hart, of Investment Solutions, said: "The cut is certainly as expected and almost forced because of the quantitative easing by the US." He cautioned that over-cutting rates could be dangerous in the longer term.