Cablegate: South Africa: Sarb Lowers Interest Rates

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A



1. (U) Tito Mboweni, Governor of the South African Reserve
Bank (SARB), announced a 0.5 percent decrease in the bank's
repurchase rate on August 12. The decision, taken by the
Monetary Policy Committee, served to lower the repurchase
rate to 7.5 percent, the lowest since the inception of a
fixed repurchase rate in September 2001. The decision caught
most economic analysts by surprise, but may have been
influenced by widespread opinion that the rand is too strong
and a union march on the SARB the previous day. The
repurchase rate is the rate at which the SARB lends to local
banks. End Summary.

Unions and Industry Wanted the Cut

2. (U) The decision by the Monetary Policy Committee came a
day after union workers marched on the SARB to protest the
effect of a strong rand on industry, particularly on gold
mining, which has experienced thousands of layoffs in recent
months. In his statement, Mboweni acknowledged that the
strong rand was seriously hurting mining and manufacturing in
South Africa and distorting business planning. He noted that
South Africa's international trade balance had fallen from a
R30 billion surplus in the second quarter of 2003 to a
deficit of R5.5 billion in second quarter of 2004.

Markets React to Interest Rate Movements

3. (U) Just two days earlier, the Federal Reserve had raised
U.S. interest rates a quarter point for the second time in 45
days. The two actions served to close the interest rate
differential between the two economies and reduce the
incentive to portfolio investors to invest in rand based
assets. Foreign exchange markets reacted immediately, as the
rand fell 3 percent in value to 6.5/dollar in next day
trading. Capital markets also saw a burst of activity
surrounding South African gold mining stocks, many of which
jumped several percentage points.

Mboweni Focuses on Positive Outlook for Inflation
--------------------------------------------- ----

4. (U) In his public statement, Mboweni chose to focus mostly
on the positive outlook for inflation. He noted that
producer price inflation remained low, though no longer in
the negative category, and that import price inflation had
remained negative due to the strengthening rand. While
consumer prices were picking up, led by the cost of vehicles,
healthcare, alcohol, tobacco, fuel, and certain administered
prices, food prices were recovering from last year's drought
and the government was likely to exercise greater restraint
on administered prices (e.g., electricity and water) in
future. Continued fiscal prudence, low capacity utilization,
and the declining trend in inflation expectations translated
into an overall positive outlook for inflation. In the
second quarter of 2004, annualized CPIX (consumer inflation
less mortgage costs) was 5.2 percent.


5. (SBU) Mboweni was reappointed by President Mbeki to
another five-year term as SARB Governor on July 23, after
consultations with Finance Minister Trevor Manuel who was
rumored to favor a cut in interest rates. With the unions
marching the previous day and widespread public opinion in
support of lower interest rates, one wonders what role
political pressure played this time around in the decision of
the Monetary Policy Committee. Indeed, Mboweni could have
just as easily focused on threats to inflation, including
rising wage costs and record oil prices, in his statement to
support leaving the repurchase rate unchanged. The Federal
Reserve had finally begun to raise U.S. interest rates, and
this would slowly impact the dollar value of the rand.
Moreover, CPIX in the first quarter of 2004 was 7.2 percent,
above the SARB's annual target range of 3-6 percent.

6. (SBU) If political pressure did play a role, then union
pressure may have been the deciding factor. On August 11,
the day before the Monetary Policy Committee's decision,
Mboweni met with members of the National Union of Mineworkers
and the Congress of South African Trade Unions (COSATU) after
thousands marched on the SARB to protest the strong value of
the rand. Chamber of Mines representatives dotted the march.
Despite this protest, most economic analysts believed that
the Mboweni and his Monetary Policy Committee would stay true
to their inflation fighting policies and leave the repurchase
rate unchanged. This seemed affirmed by Mboweni's promise to
give the unions a detailed response in fourteen days, well
after the Monetary Policy Committee's decision the following
day. If actions speak louder than words, then the decision
to lower interest rates may obviate the need for Mboweni to
provide much detail in his promised response. The unions got
what they wanted. We note that prior to his appointment as
SARB Governor in 1998, Mboweni served as Minister of Labor in
Nelson Mandela's Cabinet.

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