Robert Laing

Robert Laing

A household paying off a R962800 bond - Absa's average house price for January - over 20 years at prime, will have R704 more disposable income this month thanks to yesterday's 1percent cut in interest rates.

Reserve Bank governor Tito Mboweni announced yesterday that the Monetary Policy Committee he chairs voted to cut the repo rate by 100 basis points.

This was widely expected. Nine out of 14 economists polled by I-Net Bridge predicted the 100 basis point reduction, while four were expecting a cut of 50 basis points. One had gone as far as predicting a full 150 basis point cut.

This double cut signalled the Reserve Bank's belief that inflation is now firmly on a downward trend. Yesterday marked the first time since October 2003 that the central bank had reduced interest rates by more than 0,5percent.

Yesterday's move takes the central bank's repo rate down to 10,5percent, and the commercial bank's prime rate down to 14percent.

But most people pay more than prime on their loans. On credit cards, the interest charged is about 12percent above prime, meaning credit card interest should drop from 27percent to 26percent this month.

Economists are optimistic another rate cut will be on the cards when the Monetary Policy Committee next votes on April 16. Prime is expected to drop a further 2percent to 12percent by the end of this year.

Mboweni said the Reserve Bank expects inflation to drop to 7,5percent in the first quarter of this year, dipping to 5,2percent in the third quarter.

But Standard Bank economist Johan Botha warned that the central bank may be over-optimistic: "Food prices have remained high, while electricity hikes are in the pipeline. The current decline in inflation may not be sustainable."