Feb 05 2009 15:29 Bevan Lakay

Cape Town - The South African Reserve Bank's monetary policy committee (MPC) has cut the key repo rate by 100 basis points, bringing it down to 10.5%, with the prime lending rate dropping to 14%.

The repo rate is the rate at which the central bank lends to other banks, and the prime lending rate is the benchmark rate at which banks lend to customers.

This is the second successive reduction in the repo rate. The committee's 50 basis-point cut in December marked the end of a 500 basis-point tightening in rates since June 2006, which resulted in a rise in the cost of debt servicing for South African consumers.

According to a Reuters poll, 16 economists were in favour of a 100 basis-point cut, while 11 forecast a 50 basis-point reduction. Economists forecasting the 100 basis point cut pointed to the slowdown in the South African economy, rate cuts by other central banks around the world, and the bleak outlook for growth in 2009 as reasons to support their forecasts.

In a research note on Thursday, Absa Capital also forecast a 100 basis-point cut. It said that base effects stemming from past high fuel and food prices should see inflation continue to fall sharply in 2009. The positive inflation outlook, it said, together with prospects of markedly slower economic growth augured well for a 100 basis-point cut.

The 100 basis-point cut marks a break in the bank's recent tradition - over the last five years, it had kept to changes of 50 basis-point increments.

- Fin24.com