Lesetja Kganyago interest rate

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

South African Reserve Bank announces interest rate cut as predicted

Sarb has reduced the interest rate by 0.25%, just as expected, in order to try and stimulate more growth in the stagnating South African economy.

Lesetja Kganyago interest rate

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

Governor of the South African Reserve Bank (Sarb) Lesetja Kganyago has announced the expected 25 basis points cut to the repurchase rate (repo rate), effectively making borrowing money a bit cheaper.

The news follows a three-day meeting of the monetary policy committee and mirrors exactly what was predicted by leading South African economists the day before.

Unanimous decision on interest rate

The decision by the Reserve Bank to reduce the repo rate to 6.5% per annum was a unanimous one reached by the committee and will serve to try and stimulate the stagnating economy.

“Electricity, food and fuel price inflation have shaped the trend in headline inflation,” Kganyago revealed.

“Although food price inflation has continued to surprise on the down side, it is expected to start rising from the end of 2019.”

So far in 2019, the growth rate of the economy has been hovering just below 1% and it is hoped this move will help growth accelerate beyond this point.

However, it is not a huge move in the grand scheme of things as it is merely undoing the 25 basis point increase to the repo rate Sarb instituted in November 2018.

Stable inflation

At the time, that decision was taken to halt rising consumer inflation and it is believed the consumer price index (CPI) has stabilised enough for them to again reduce the interest rate.

“Headline CPI inflation is expected to peak at 5.4% in the first quarter of 2020 and settle at 4.5% in the last two quarters of 2021.

“The forecast for core inflation is lower at 4.4% in 2019 (down from 4.5%), 4.7% in 2020 (down from 4.8%) and is unchanged at 4.5% in 2021. Headline CPI inflation is expected to peak at 5.4% in the first quarter of 2020 and settle at 4.5% in the last two quarters of 2021.”

The repurchase rate is significant because it is effectively how much Sarb charges commercial banks to borrow money and this reduction will mean a 0.25% decrease in interest rates charged by South African banks to 10%.

This will make it more affordable for South Africans to borrow money and, in theory, promote spending and growth throughout the economy.