What economists expect the Reserve Bank to do this week, and what they would prefer it to do, are two separate issues. A cut in interest rates this week is in the bag for the first time in 20 months that much economists agree upon.

There were compelling reasons for cutting interest rates even before Statistics SA chopped two percentage points off the consumer inflation figures last month. Inflation had started abating, largely as a result of the rand's appreciation since last year, but was given a further boost from the downward revisions due to Statistics SA's error.

As a result, the Bank's targeted measure, the latest CPIX (consumer inflation less mortgages) for April is at 8,5%, considerably lower than the 11,3% (revised to 9,3%) figure that the Bank's monetary policy committee (MPC) sat with at its March meeting.

Another key reason for reducing interest rates is the slowdown in gross domestic product (GDP) growth in the first quarter. GDP slowed to 1,5% on a seasonally adjusted annualised basis in the first quarter compared to 2,4% growth in the fourth quarter, mainly due to the contraction in export-driven sectors.

Although SA is more exportdriven now than it was a decade ago, the mainstay of economic growth remains domestic demand. A cut in interest rates would boost consumer spending, so the argument goes, helping to buoy economic growth to compensate for lower export growth.

The debate about a cut in interest rates seems settled but the question remains by how much . Most economists expect the Bank to err on the side of caution and lower interest rates by one percentage point on Thursday.

The marketshave priced in a reduction in the Bank's repurchase rate from 13,5% to 12,5%, making it the first cut in interest rates since September 2001.

However, since Statistics SA's correction in inflation figures, some analysts say the Bank has enough space to act more aggressively by cutting interest rates by more than one percentage point.

Merrill Lynch economist Nazmeera Moola says there is a case for a three percentage point cut. The revision to CPI has pushed up real interest rates to a level that makes it prohibitive to growth, Moola argues.

Real prime interest rates, at 8,5%, would rise to 10,7% by the end of the year if the Bank cuts by one percentage point at each of the policy committee meetings this year.

The domestic economy looks likely to "grind to a halt", with GDP growth of 1,8% this year looking "optimistic", Moola said in a research note. "When you're heading for the edge of the cliff, you don't start touching the foot brake.

You pull on the hand brake as hard as you can," she said, making the case for a three percentage point rate cut.

But, with the MPC being conservative, it was more likely to decide on a one percentage point cut.

On the other hand, cutting interest rates aggressively as a consequence of Statistics SA's mistake or to spur economic growth could undermine the Bank's credibility, says SCMB treasury economist Goolam Ballim. Compensating for Statistics SA's mistake by adjusting interest rates lower presupposes that the Bank acts mechanically in managing inflation risk, says Ballim.

While growth has suffered from declining exports, Ballim says cutting rates aggressively would not boost export demand in a climate where world trade is contracting.

The Bank was likely to remain concerned about high growth in wages and administered prices, which increases the risks that CPIX could fall closer to the upper limit of the 3% to 6% inflation target.

Business Day