Reserve bank unanimously decides to cut the repo rate

The South African Reserve Bank’s monetary policy committee has unanimously decided to reduce the repo rate by 25 basis points, to 6.25%. This is the rate at which the bank lends money to other banks, which then lend it to people for things such as mortgages.

The central bank revised the forecasted GDP growth for 2019 to 0.4%, from 0.5%. The forecasts for 2020 and 2021 have also decreased to 1.2%, from 1.4%, and to 1.6%, from 1.7% respectively. The GDP forecast for 2022 is 1.9%.

The decrease was due to lower growth than previously expected in the third and fourth quarter of 2019.

Speaking just before the announcement, several experts told the Mail & Guardian that a cut was imminent because the country’s economy is not in a good place.

“It’s more than justified,” chief economist at Stanlib, Kevin Lings said, adding that there were several factors in favour of a rate cut.

Lings said in recent months inflation has been much lower than normal, and is expected to remain under control. Consumer inflation in November, for example, was at a nine-year low of 3.6%. That is well within the 3% to 6% target range that the bank sets as where it wants to keep inflation. The rand and exchange rate have also been relatively stable, despite electricity outages and the looming credit rating downgrade.

Keeping inflation in that range is one of its core functions.

The Stanlib economist added that a rate cut stimulates the economy, by giving people more money to spend. “Clearly, in a couple of months — if those conditions prevail — then there would be justification for additional cutting in the interest rate.”

But he forecast that, in the coming months, the bank would adopt a “wait and see” approach before any cuts. This will allow them to interrogate the February budget speech, Moody’s credit rating announcement in March and also whether Eskom will be able to keep the lights on.

FNB economist Matlhodi Matsei said the factors allowing room for a rate cut are substantial, but she had expected the central bank to delay making a cut until after the February budget.

“We are currently in a challenging environment where it’s not easy to predict what will happen with anything, which is why the Sarb would rather thread with caution and wait and see. These are challenging times,” she said.

Matsei said the budget will determine whether or not Moody’s will downgrade South Africa or leave its rating unchanged at sub-investment.

Moody’s is the only credit rating agency that has not downgraded the country to junk status.

The FNB economist said it’s already clear that this will be a difficult budget, because it is not clear if they will be able to reduce government spending and save R150-billion.

In the October budget, Finance Minister Tito Mboweni announced that they are planning to cut the public sector wage bill by R27-billion over three years, which will then save the fiscus R150 billion. That’s the number that the government has said it needs to save because it is spending more than it is earning.

South Africa’s national debt stands at R3-trillion. Treasury warns that it could grow to R4.5-trillion by 2022/23.

Matsei said that if the budget goes badly, there is a high chance that Moody’s will have to downgrade the country’s sovereign debt to junk status. If that happens, the reserve bank then can raise the repo rate to cushion the effects of a downgrade.

But Michael Treherne, a portfolio manager at Vestact, said no one really knows how a downgrade will affect South Africa and that the Reserve Bank should work on stimulating the economy by cutting rates. “If we get downgraded, people will get over themselves and realise that not much has changed and things will go back to normal”.

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

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