US embassy cable - 04PRETORIA3681

UNCLAS SECTION 01 OF 02 PRETORIA 003681 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, SF 
SUBJECT: SOUTH AFRICA: SARB LOWERS INTEREST RATES 
 
SENSITIVE BUT UNCLASSIFIED, PROTECT ACCORDINGLY. 
 
Summary 
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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. 
 
Comment 
------- 
 
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. 
FRAZER