Ferial Haffajee
This week’s rate cut is a drop in the ocean. Wednesday’s decrease in the repo rate will have little significance for wider South Africa because commercial lenders are unlikely to follow suit immediately.
But the small cut – one-quarter of a percentage point – in the interest rate at which the Reserve Bank lends to commercial banks is valuable as an indicator.
The Reserve Bank engineered the cut to applaud market discipline. A further decrease of the same magnitude could see banks lower their prime rates.
Economists said the next cut in the repo rate could happen next week when banks might be prompted to lower their lending rates to consumers.
But Tony Twine of Econometrix warned that the markets should take heed of the Reserve Bank’s entire message. In an aside, the central bank’s deputy governor, Tim Cross, said this week that increased turbulence in emerging markets could see the repo rate rise again.
“His message of `take it easy’ is an aside the banks don’t want to hear,” said Twine. The repo rate was introduced earlier this year to ward off speculation on the rand and to tackle the growth of credit.
Economist Asgar Adelzadeh of the National Institute for Economic Policy said the cut was cosmetic. “The Reserve Bank was under a lot of pressure to lower rates. But the cut won’t help much.” Although bonds and stocks enjoyed a fillip from the move, a more significant decrease is necessary to have an impact on the broader economy.
The exodus of hedge funds from the markets was an opportunity for a “bold initiative” to ward off future crises, said Adelzadeh. The introduction of some form of capital control would lay the foundation for a deeper interest rate cut necessary for economic growth.
The Consumer Institute has been keeping an eagle eye on interest rates. “I hope the banks are as quick in bringing down rates as they are in increasing them,” said the institute’s Diane Terblanche this week.
She added: “Interest rates are still very, very high. Even such a small cut is meaningful to consumers.”
Terblanche said the only positive part of the recent financial crunch was that it had forced many South African consumers to cast a hard eye over their spending. A rate cut that coincided with the beginning of the Christmas marketing season might have an adverse effect.
“Consumers should use an easing [of interest rates] to pay off debts instead of incurring more debts,” she advised.