South Africa has joined the global trend of lowering interest rates to combat the current economic slowdown. The move is an abrupt reversal for a country that has been raising interest rates for years to control inflation. The change signals that Africa's largest economy is struggling.
Newspapers are calling the decision a "Christmas gift" from the central bank. Interest rates here have risen five percentage points since 2006. But Reserve Bank Governor Tito Mboweni said rates would now go down by half a point, to 11.5 percent. He told reporters the global economic slowdown has caught up with South Africans.
"Lets be fair to everybody, there are lots of folks out there who are under stress," Mboweni said. "And you know one cannot conduct monetary policy as if you are an island unaffected by what happens in [the] mainland."
South African factories and mines are planning to layoff more than 15,000 workers in 2009. As well, consumer spending has dropped sharply. Mboweni said it was time to ease restrictions on credit, even though the economy as a whole is still growing.
"And it is very clear by looking at the data that certain sub-sectors of the South African economy are in recession," Mboweni said. "But the whole economy is not in recession. And it is unlikely from what we know at the moment to go into recession."
The rate cut means people will pay less each month on home and car loans. But not everyone is cheering.
"For those people who are in financial distress, frankly half a percentage point is too little too late," said Rael Levitt, who heads an investment management firm called the Alliance Group.
Levitt says Thursday's rate cut may help those bordering on bankruptcy. But he says it will not be large enough to generate widespread growth.
"There have been far more dramatic rate cuts in the U.S., certain European countries, as well as in Australia as well and in East Asia. And our feeling is that to really kick start the economy the cut would have to be up to four percent," Levitt said.
At the firm Investment Solutions, chief economist Chris Hart agrees that Thursday's modest cut will not be enough to save those sectors of the economy that are already in recession. And, Hart says the situation in South Africa will have a broader effect throughout Africa.
"Slowdown in South Africa can cause South African corporates and investment intentions to be cut as companies conserve cash and become more conservative," Hart said. "And so it can result in a lower investment flow from South Africa into other African countries."
But Hart believes the half-point cut is just the beginning, and that rates will continue to drop into 2009.
