Johannesburg — THE Reserve Bank cut interest rates to a 30-year low yesterday, warning that the pace of recovery would slow in the months ahead.

Strength in the rand figured in the Bank's widely expected decision to cut its repo rate by half a percentage point to 6%, as it helps to improve the inflation outlook.

But the currency firmed after the news, showing that the high "yield appeal" of local assets was still intact for global investors.

SA's benign inflation outlook created room for monetary policy to "provide additional stimulus to the somewhat fragile recovery of the domestic economy, which remains vulnerable to the uncertain global environment," the Bank said.

Governor Gill Marcus said scope for further rate cuts was limited, but dismissed speculation that interest rates would inevitably rise next year.

Most analysts said it was clear the downward cycle had ended, but interest rates were likely to remain "on hold" for longer than expected, possibly until 2012.

Business Unity SA welcomed the decision. It acknowledged that other policy shifts were needed to boost modest economic growth, but suggested interest rates may have to be reassessed again.

Ms Marcus said the Bank would remain "forward-looking" and informed by close scrutiny of economic data, as well as other developments. The Bank has now reduced its repo rate by six percentage points since late 2008. That has taken the prime lending rates of commercial banks to 9,5% -- their lowest since 1980.

Despite this, SA's pace of growth was expected to "remain below potential for some time, against the backdrop of a fragile global economy", the Bank said.

Although fears of a reversion to recession in advanced economies had "diminished somewhat, the downside risks remain high". That would also keep global inflation pressures at bay.

The decision of the Bank's monetary policy committee (MPC) yesterday was simplified by lower than expected inflation in SA, which allowed it to revise its inflation forecasts down.

Consumer prices were likely to average 3,7% in the third quarter of this year, well inside the official target range of 3%- 6% and well below the Bank's forecast in July of 4,5%. They would then average 4,8% next year, and rise to 5,1% by the end of 2012, the Bank said.

The "decision to cut the repo rate ... was absolutely the right thing to have done", said Standard Chartered's regional research head for Africa, Razia Khan. "Inflation has behaved better than expected and looks like it will remain benign for longer."

The Bank said growth during the second quarter of the year -- which slowed to 3,2% from 4,6% in the first quarter -- had been surprisingly low, mainly due to a sharp contraction in mining. "Growth in the second half is expected to moderate further," it said.

Spending was likely to moderate in the aftermath of the World Cup, and price hikes during the event had quickly reversed, it said. High wage settlements were the main threat to the inflation outlook, it warned. Unless accompanied by higher productivity, the pay hikes could put pressure on domestic prices and hurt SA's global competitiveness.

They were also likely to have a "negative impact" on jobs.

Strength in the rand could lead to lower than expected inflation, and make the currency a bit too strong for SA's recovery. There was little the Bank could do about this as it was driven by foreign capital inflows, the MPC said.

The search for higher yield by pension funds in developed economies was affecting other emerging markets, and appeared to be more long term than in the past, it said. Citigroup trader Julian Wilson said the global trend would probably lift the rand to the key R7/ level , despite the cut.