The South African Reserve Bank’s monetary policy committee has unanimously decided to cut the repo rate by 100 basis points.
This takes the rate to 5.25% per annum, from 6.25%.
Although the bank decided to cut the repo rate, Governor Lesetja Kganyago emphasised that monetary policy on its own cannot improve the potential growth rate of the economy or reduce fiscal risks.
Covid-19 is forecast to slash global growth. Since the virus has hit South Africa’s shores, markets have gyrated. The JSE plunged 12% this week, while the rand has also been weak, trading at levels of more than R17 to the US dollar.
Kganyago said that the general stance of the monetary policy committee has left them in a good position from which to cut the rates.
Other countries, where the interest rate is near zero, do not have this space, he said.
The governor said the committee believes the steps it has taken will have the desired effect on the economy and there is no need yet to use unconventional tools.
Kganyago said that the decrease will mitigate the risks that households and businesses are currently facing, as they would have more money to spend — or less money to pay back to banks.
But he added that monetary policy alone cannot alleviate the country’s economic woes and South Africa’s economic outlook remains “fragile”.
Kganyago says Covid-19 is likely to result in weaker demand for exports and domestic goods and services, but its effect on the economy could be partly offset by lower oil prices.
The governor forecast that headline consumer price inflation would average 3.8% for 2020, 4.6% for 2021 and 4.4% in 2022.
This leaves inflation within the 3% to 6% target range set by the bank.
The decrease is higher than the 50 basis points expected by trade unions and economists.
At its last meeting in January, the bank’s monetary policy committee unanimously decided to reduce the repo rate by 25 basis points, to 6.25%.
Since then, the country’s economy has plunged into a technical recession after it failed to grow for two consecutive quarters.