Lesetja Kganyago interest rate

South African Reserve Bank governor Lesetja Kganyago. Photo: GovernmentZA of Flickr

Interest rate cut just ‘plaster on a gaping wound’, say analysts

The SA Reserve Bank’s decision to cut rates by 1% was unexpected, but needed. More reductions are likely in 2020 as the economy struggles.

Lesetja Kganyago interest rate

South African Reserve Bank governor Lesetja Kganyago. Photo: GovernmentZA of Flickr

The surprise decision by the South African Reserve Bank to cut the repo and interest rate by 1% (100 basis points) yesterday, Thursday 19 March 19, has been widely welcomed, but with the warning that further decisive action is still needed to help the struggling economy.

Razia Khan, chief economist at Standard Chartered, said the cut was a step in the right direction and the 100 basis points was fully justified, given that it was difficult to see where growth would come from with the economy being ravaged by the coronavirus.

“Although I was one of the people who called for a 1% reduction, it is quite a surprise, but a positive one, given the weak global growth and the fact that inflation is probably heading towards 3% over the next few months,” said Johann Els, head of economic research at Old Mutual.

More rate cuts still likely to come in 2020

He believed there would still be further rate cuts during 2020 and his own prediction was that GDP would shrink by 2%, rather than the 0.2% predicted by the Reserve Bank in its announcement yesterday.

He noted that South Africa still has more room to cut its interest rates, unlike other economies in Europe which may be forced into quantitative easing.

Quantitative easing, commonly known as QE, is an unconventional monetary policy in which a central bank purchases longer-term government securities or other types of securities from the open market in order to increase the money supply and encourage lending and investment.

Jameel Ahmad, global head of currency strategy and market research at ForexTime, said the rate cut was not a quick fix.

“No one should expect this interest rate cut to be a magic wand to fix things, especially when it comes to market volatility and the COVID-19 pandemic, as this is unprecedented territory that has not been seen in a lifetime.

“What this interest rate can do is help support the economy until the dust has settled with the virus, but this is like putting the emergency brakes on a car and not knowing when it can drive again. Further fiscal, business, citizen and monetary support is still required,” he stressed.

Some believe Reserve Bank could have done more to boost the economy

Independent economist, Rian le Roux, told Bloomberg he believed the Reserve Bank could have done more. 

“While it was the right thing to do, this is like putting a plaster on a gaping wound,” Le Roux said. “Is that enough for the economy? No way.”

BNP Paribas senior economist Jeff Schultz agreed that the cut would not provide substantial support for the struggling economy.

“It can help to cushion some of the blow to the economy. For every 25 basis points that the Reserve Bank delivers, it adds about 0.1% to the economy. We are not talking about a game-changer for growth this year, but over the next 12 months it could add up to half a percentage point to GDP,” he said.

“It is not massive but also not insignificant…We do think this is a step in the right direction. But to create more jobs we need the global economy to be fairing much better, which for the next six months looks unlikely.”,

Property industry says rate cut a critical step towards survival

Meanwhile, the property industry has received the 1% interest cut with enthusiasm. 

“Against the backdrop of the unprecedented times we find ourselves in, [the] decision by the Monetary Policy Committee to reduce the repo rate by 100 basis points is a critical step towards financial survival, as consumers and our economy navigate unchartered territory and unexpected new challenges as a result of the onset of the coronavirus,” said Dr Andrew Golding, chief executive of the Pam Golding Property group.

“The ensuing reduction in the interest rate, coupled with next month’s likely substantial drop in the fuel price as a result of the dramatic reduction in global oil prices – despite the additional 25c a litre tariff increase as announced in the recent National Budget – affords some relief to South African consumers and [is] hopefully part of the boost our economy needs right now.”

Leadhome CEO Marcél du Toit said the cut would create a more positive buyers’ mindset and boost the market.

“We believe that the cut of 100 basis points is necessary and will support much-needed economic growth. While the rate has not been cut at sequential meetings since 2010, there are pressures for the bank to ease monetary policies,” he stated.