Dec. 11 (Bloomberg) -- South Africa’s central bank cut its benchmark interest rate by half a percentage point, the first reduction in more than three years, as inflation slowed and the economy grew at the weakest pace in a decade.

The repurchase rate was lowered to 11.5 percent, Governor Tito Mboweni said in a televised speech from Pretoria today. The decision was forecast by 14 of 21 economists surveyed by Bloomberg.

South Africa joins central banks around the world that are slashing interest rates to help boost economic growth following the worst financial crisis since the 1930s. A slump in demand for gold and platinum, South Africa’s biggest exports, has forced miners such as Lonmin Plc to fire hundreds of workers, threatening to push up a jobless rate that already stands at 23 percent.

“With domestic demand remaining under pressure and exports coming down, we are in for a double whammy next year,” said Elize Kruger, an economist at Thebe Financial Services Ltd. in Johannesburg. “They have ample justification to continue to cut rates into next year, and to cut more aggressively.”

The rand was at 10.025 against the dollar as of 5:19 p.m. in Johannesburg from 10.1332 before the decision. The yield on the R153 government bond, due 2010, rose 12 basis points to 7.92 percent.

Inflation Forecast

Inflation will probably drop within the 3 percent to 6 percent target range by the third quarter of next year, averaging 6.2 percent for 2009, Mboweni said today. In October, the bank forecast that the target will be reached in the first quarter of 2010. Prices rose an annual 12.4 percent in October.

The Reserve Bank also had room to cut interest rates today after inflation expectations fell. Analysts, businessmen and labor union officials expect the headline inflation rate to average 8.6 percent in 2009, down from 8.7 percent forecast in the third quarter, the Bureau for Economic Research said in an e-mail today.

“Inflation is going to fall noticeably next year,” Kevin Lings, an economist at Stanlib Asset Management in Johannesburg, said in a televised interview. “That sets up a situation where we can continue to cut interest rates.”

A drop in consumer spending may ease price pressures, while oil prices have plunged 62 percent in New York since September. Inflation, which slowed for a second month in October, reaching 12.4 percent, will ease to an average of 5.9 percent in 2010, Mboweni said.

‘Correct Call’

“All scenario exercises that we went through show inflation is going to radically come down,” Mboweni said. “I’m quite certain that we made the correct call in this instance. We are not making a call that people must go on a Christmas spending binge.”

Today’s rate cut was the first since April 2005. Since June 2006 the repurchase rate has been increased by 5 percentage points, slashing vehicle sales, which dropped an annual 28 percent in November, according to an industry body. Retail sales declined for a sixth month in a row in October, falling 2.3 percent from a year ago, the statistics office said yesterday.

“This releases pressure,” Jacques Schindehutte, finance director at Absa Group Ltd., said in a phone interview. “If the Reserve Bank keeps reducing interest rates, the consumer won’t be down and out.”

Economic growth slowed to an annualized 0.2 percent in the third quarter from 5.1 percent in the previous three months as six interest rate increases since last year pushed the retail industry into recession. Lonmin, the world’s third-biggest platinum producer, said on Dec. 1 it may cut as many as 6,000 jobs at its South African operations.

“Lots of folks out there are in distress,” Mboweni said. “One can’t conduct monetary policy as though you are an island, unaffected by what is happening on the mainland.”

Debate

Two of the seven Monetary Policy Committee members had argued for an interest rate cut of 1 percentage point, while the “bulk of the people felt that 50 basis points would help us achieve the inflation targeting objective,” Mboweni said.

The current account deficit, which widened to 7.9 percent of gross domestic product in the third quarter from 7.3 percent in the previous three months, will “likely moderate in coming months” because of lower oil prices and a drop in dividend payments to foreigners, Mboweni said.

The rand has dropped 32 percent against the dollar this year, the worst performer of 16 major currencies tracked by Bloomberg, on concern South Africa will struggle to fund the deficit as a global recession spreads. South Africa relies on foreign investment in stocks and bonds to finance the shortfall.

The rand “remains the most significant upside risk to the inflation outlook,” Mboweni said.

While unit labor costs rose 12.5 percent in the third quarter from the same period a year ago, a drop in the inflation rate “may have a moderating impact” on wage costs, the governor added.

To contact the reporters on this story: Nasreen Seria in Johannesburg nseria@bloomberg.netVernon Wessels in Johannesburg at vwessels@bloomberg.net

Last Updated: December 11, 2008 10:52 EST