Repo rate falls to, 3.5% — its lowest since 1998

The South African Reserve Bank (Sarb) has cut the repo rate by another 25 basis points, to 3.5% a year, from 3.75%.

The repo rate determines the interest rate at which the central bank lends money to commercial banks. The lower the rate, the lower the interest people pay their banks on loans.  

The cut by the monetary policy committee (MPC) on Thursday afternoon adds to the 275 basis points the central bank has cut since March in response to the economic downturn caused by Covid-19

Reserve Bank governor Lesetja Kganyago said that this is the lowest repo rate since the system was introduced in 1998.

Kganyago said the monetary intervention in terms of cutting rates has not yet filtered into the economy, apart from assisting borrowers who had debt. He added that, currently, it’s difficult to judge the effects the cuts are having on the overall economy.

But given the extent of the change of inflation, as well as growth outlook, the MPC deemed it necessary to implement a further cut. 

In July, numbers for South Africa’s consumer inflation came at 2.1%, the lowest in more than 15 years. This is the first time inflation has been below the 3% to 6% target inflation range, which was first introduced in 2000. 

The Reserve Bank targets inflation to maintain price stability — which helps to avoid both prolonged inflation and deflation. 

Kganyago said that inflation is well contained and that, for the next two years, the bank does not see inflation as a problem, because it is within the target range.

The bank’s headline consumer price inflation forecast averages 3.4% in 2020 and is marginally lower than its previously forecast of 4.3% for 2021 and 2022. The forecast for core inflation is lower, at 3.3% in 2020, and remains broadly stable at 3.9% and 4.1% in 2021 and 2022, respectively.

The bank has revised its gross domestic product (GDP) forecast, and expects it to contract by 7.3%, instead of the 7% predicted in May. 

Kganyago says that even if the lockdown is relaxed in the coming months, investment, exports and imports are expected to decline sharply for the year as a whole. Job losses are also expected to rise further.

He said the easing of the lockdown has increased growth in the few weeks and that high-frequency activity indicators show a pickup in spending from extremely low levels.

He cautioned that getting the economy back to pre-pandemic activity levels will take time. GDP is expected to grow by 3.7% in 2021, and by 2.8% in 2022. 

Regarding the bank’s growth forecast, Kganyago explained that uncertainty makes economic forecasting very difficult. 

Nicky Weimar, senior economist at Nedbank, says the latest repo rate shows that there is genuine concern about the state of the economy.  

She says the MPC does not think that inflation is a problem, but noted that it has revised its GDP forecast down. Weimar says this indicates that MPC members believe the effects of C ovid-19 and the lockdown will hit the country with a delay, causing further economic contraction. “It’s going to have a long tail and when the tail hits us, it’s going to be fairly hard. That is clearly in the numbers and it’s motivating that they’re cutting the rates further,” she said.  

FNB chief economist Mamello Matikinca-Ngwenya said economic data continues to show the large economic impact of the pandemic and signals a sharp contraction in output this year. 

She said this will, unfortunately, mean income losses for households and businesses alike. 

“The ensuing demand shocks suggest that inflation will likely remain low throughout the forecast horizon. We expect inflation to test the lower bound of the target band and average around 3% this year,” she said.

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