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Reserve Bank cuts repo rate

In a move that will bring some relief to consumers the South African Reserve Bank (SARB) cut its repo rate on Thursday to 6.5%

The step was largely expected, particularly in light of weak local economic growth which is expected to keep inflation in check as well as moves towards easing monetary policy globally.

It comes however at a time when the bank has been questioned over its approach to monetary policy — a debate that has been further clouded by calls for a change in the bank’s mandate as well as calls for its nationalisation.

In his statement following the banks monetary policy committee meeting, Reserve Bank governor Lesetja Kganyago again stressed the banks’ position that the “current challenges facing the economy are primarily structural in nature and cannot be resolved by monetary policy alone”. 

“Implementation of prudent macroeconomic policies together with structural reforms that raise potential growth and lower the cost structure of the economy remains urgent.,” Kganyago said.

The SARB again reduced its economic forecasts for 2019 to 0.6%, down from 1.0% in May.

Kganayago also warned that upside risks to the banks inflation outlook could be significant. “Global financial conditions can abruptly tighten due to small shifts in inflation outlooks in advanced economies and changing market sentiment.,” he said.

On the domestic front the financing needs of parastatals could place further upward pressure on the currency and long-term market interest rates for all borrowers, he said, adding that “food, electricity and water prices also remain important risks to the inflation outlook.

The psychological effect of the interest rate cut on consumer and business confidence will possibly be greater than its real effect on the economy said professor Raymond Parsons, economist at the North-West University Business School.

“Other costs, such as electricity tariffs, are in any case rising faster than borrowing costs have fallen. With the SARB having now yet again reduced its 2019 growth forecast, this time from 1% to 0.6%, there needs to be a further robust debate on what is the future appropriate monetary policy response in these economic circumstances.,” Parson said in a statement.

A cut of 50 basis points would have had more economic impact, but with a small level risk to inflation expectations said Parsons.

Nevertheless the SARB was right “to again warn that SA must not look to monetary policy to do the heavy lifting to turn the economy around”, he said.

Mamello Matikinca-Ngwenya, chief economist at FNB, said that muted inflationary pressure and weak growth, as well as the global tilt towards more accommodative monetary policy, has “provided room for easing monetary policy in South Africa”.

“While we believe there is scope for another rate cut, the bank will, however, need to assess fiscal risks before attempting to ease policy further,” she said. 



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Lynley Donnelly
Lynley Donnelly
Lynley is a senior business reporter at the Mail & Guardian. But she has covered everything from social justice to general news to parliament - with the occasional segue into fashion and arts. She keeps coming to work because she loves stories, especially the kind that help people make sense of their world.

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