Johannesburg — THE Reserve Bank cut interest rates by a percentage point yesterday, as most had expected, but governor Tito Mboweni warned that further "aggressive" easing was unlikely because of stubbornly high inflation.

Shrinking economic output and the onset of SA's first recession in 17 years prompted the Bank's monetary policy committee (MPC) to reduce the repo rate to 7,5%, its lowest level in nearly three years.

Mboweni said the economy would shrink again in the second quarter, albeit at a "more moderate pace" than in the first quarter, when it shrank 6,4%, the steepest in 25 years.

Prospects for a rebound would depend largely on "the pace and magnitude of the recovery in the global economy, which was set to be "slow and protracted", he said. The difference between actual and potential economic growth would help bring inflation down in the long term, despite some near-term "inertia", the Bank said.

There were no surprises but in a press conference after the televised address Mboweni took the unusual step of signalling the outlook for monetary policy.

"Given the kind of stickiness seen in inflation outcomes, the mood in the committee is not for any further significant reductions in the repo rate," he said.

"There is a feeling we have probably done as much as we can do. Now maybe it's time to pause and watch," he said. Debate in the two-day MPC meeting was quite "intense", with some initially arguing for a cut of half a percentage point, he said.

Local money markets sold off heavily on the remarks, unwinding bets that the repo rate could fall as far as 6,5% in coming weeks. Government bonds weakened, with yields on the benchmark 2015 bond up five basis points to 8,25%.

Cosatu said it was angry at the rate cut as it was less than half of what it had demanded. While welcoming the decision, business leaders urged more cuts.

The MPC has reduced interest rates by 4,5 percentage points since December. It takes changes up to two years to be fully felt. Mboweni is not ruling out more cuts and analysts say there is still scope for some modest easing, depending on how the local economy performs.

"Our read on this is that we will probably see a move to ease rates only half a percentage point in June, after which interest rates may be on hold," said Razia Khan, Africa research head for Standard Chartered Bank in London.

Yesterday's news that prices at factories, mines and farms fell last month more sharply than expected back the view that inflation pressures are waning, despite "sticky" consumer inflation.

The producer price index rose to 2,9% in the year to last month, slowing from 5,3% in March, and was below an expected 3,8% rise. Analysts predict that that gauge will register annual falls from next month, helping ease pressure on consumer prices.

Consumer inflation rose to 8,4% last month, down from 8,5% in March but still above forecasts. Gains in the rand, which scaled a new month peak at less than R8/ yesterday, would help offset rising petrol prices, the Bank said.

But it highlighted risks to inflation from electricity price hikes and pointed out that food price inflation was not abating as quickly as it should, given global trends.