South Africa's central bank reduced its key interest rate for the first time in more than one-and-a-half year in a surprise move on Thursday citing increased downside risks to the economy due to the global economic slowdown.
The South African Reserve Bank's Monetary Policy Committee led by Governor Gill Marcus cut the repurchase rate by 50 basis points to 5 percent. The latest reduction was the first since November 2010. Economists had expected the bank to leave the rate unchanged.
The central bank said the prevailing conditions were appropriate for further monetary accommodation to the economy that will not undermine the inflation outlook, Marcus said in a statement. The latest reduction may help alleviate some of the pressures faced by some sectors, she added.
"A sustained increase in the potential output of the economy will require a concerted and coordinated effort from both government and the private sector," Marcus said.
"The MPC will continue to monitor both domestic and global developments and will act appropriately in line with its mandate."
The South African central bank expects the problems in the Eurozone to persist for a protracted period. Further, the bank expects the negative spill-over effects from the Eurozone crisis to South Africa to intensify.
"This unfavorable outlook is reinforced further by the fragile domestic private sector investment and consumption trends which are confirmed by declining business and consumer confidence," the bank said.
"The MPC therefore sees the risks to the growth forecast to be on the downside."
The SARB cut its growth forecast for this year to 2.7 percent from 2.9 percent. Next year, the economy is seen expanding 3.8 percent and by 4.1 percent in 2014.
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