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Reserve Bank keeps repo rate unchanged

 

 

The South African Reserve Bank (SARB) has kept the repo rate unchanged at 6.5%.

The repo rate determines the interest rate to which the central bank lends money to commercial banks — which then affects the rate at which they lend to their consumers. The bank also uses the rate to affect the inflation rate (if people have to pay back less on things such as mortgages, they will have more to spend, which then stimulates the economy).

Inflation is the rate at which things become more expensive.

The rate decision was not unanimous, with three members voting in favour of keeping the rate the same, while two members voted for a rate cut.

At a media briefing on Thursday, the reserve bank’s governor, Lesetja Kganyago, said that the bank’s monetary policy committee welcomed Wednesday’s inflation rate of 3.7% — which is the lowest level in eight years.

But he said it said it would like to see inflation anchored closer to the midpoint of the inflation target range on a sustained basis — the inflation rate target for the bank is between 3% and 6%.

The bank also revised their gross domestic product (GDP) forecast for 2019 to 0.5% from 0.6%.

Their forecast for 2020 and 2021 was also decreased to 1.4% from 1.5% and 1.7% from 1.8% respectively.

Economists that spoke to the Mail & Guardian expected the central bank to cut the repo rate in order to bolster the economy.

“I do not have much to say, I think they should have cut,” said portfolio manager at First National Bank, Wayne McCurrie, “Clearly they are worried about government debt and debt levels and the rating agency.”

McCurrie, who forecast a rate cut, said he is disappointed that it had not happened: “Because I think it would have been justified even given the government’s fiscal situation.”

Chief economist at Stanlib, Kevin Lings, said the fact that the inflation rate has significantly dropped should have been a factor that was not ignored.

He said the drop shows that the economy is weak and retailers and manufacturers are under pressure because there is no demand in the economy.

“Retailers and manufacturers find themselves facing some cost pressures such as salaries, water, electricity and rent bills which they are unable to pass to consumers in order to recoup. But clearly they cannot put up prices because consumer demand is not there and retailers are aware of that.”

But he said the Reserve Bank’s might have kept the repo rate unchanged because it was worried about Moody’s credit rating.

Early this month, the rating agency revised the country’s credit rating outlook from stable to negative. With a downgrade to junk next year likely, according to Lings, he said that the central bank is probably worried about what that credit rating downgrade will do to South African markets and in particular the exchange rate.

“It would be a thought that if you cut rates now, and you get the credit rating downgrade and the currency and the markets are under pressure, then do you have to reverse the interest rate downgrade by increasing the interest rate again?” 

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Tshegofatso Mathe
Tshegofatso Mathe is a financial trainee journalist at the Mail & Guardian

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