South Africa’s Reserve Bank has reduced interest rates by 50 basis points, in a decision that took markets by surprise.

The central bank voted to reduce the repo rate to 7.00% from 7.50%, while the prime rate was cut to 10.50% from 11.00%.

The news came as a surprise following the decision in June to keep interest rates unchanged despite many calling for a further reduction.

A statement published by the Reserve Bank said that while there are encouraging signs the global slowdown may have reached its lower turning point, “the speed and extent of the recovery are still subject to a high degree of uncertainty.”

"The South African economy appears to be lagging behind these international developments and it is likely that the domestic economy contracted in the second quarter of this year. The domestic economy remains constrained by weak global and domestic demand,” it added.

Tito Mboweni, the outgoing governor of the Reserve Bank, said the decision was very closely debated between the various committee members.

"The recent weakness in economic data, combined with poor prospects for economic growth, were the main reasons behind the Reserve Bank's decision to provide the economy with further interest-rate relief,” said Carmen Altenkirch, senior economist at Nedbank.

Hopes had been raised last month that the central bank would consider reducing rates further after the inflation figure for June fell to its lowest level in two years.