The repo rate remains unchanged at 3.5%

After cutting the repo rate by 300 basis points since the beginning of the year, the South African Reserve Bank’s Monetary Policy Committee (MPC), has decided on Thursday to keep the rate unchanged at 3.5%.

Two members of the committee voted for a further cut of 25 basis points, while three other members opted for the rates to remain unchanged.  

The central bank has steadily cut rates to mitigate the impact of the Covid-19 pandemic on the economy.

The central bank governor, Lesetja Kganyago, said that according to its quarterly projection model — a forward-looking guide in which the interest rate and exchange rate are endogenously determined — there will be no further repo rate cuts in the near term, and two rate increases in the third and fourth quarters of 2021.

Kganyago said that they believe that the steps they have taken to cut rates are yet to filter into the economy. 


“Monetary policy has eased financial conditions and improved the resilience of households and firms to the economic implications of Covid-19. The Bank has taken important steps to ensure adequate liquidity in domestic markets. Regulatory capital relief has also been provided, sustaining lending by financial institutions to households and firms,” he said. 

The repo rate determines the interest rate at which the central bank lends money to commercial banks. The lower the rate, the lower the interest people pay their banks on loans. 

The governor said the economic effects caused by the Covid-19 pandemic have been “extensive and recovery to pre-pandemic levels will take several years”. 

With this in mind, plus a seasonally adjusted and annualised quarterly contraction of gross domestic product (GDP) of 51% in quarter two of 2020, the bank has revised its GDP contraction forecasts for the year from 7.3% to 8.2%. 

The MPC also noted that growth for next year could be modest depending on the control of new virus outbreaks, the extent of supply and demand losses, and future growth in investment. Therefore it’s expecting GDP to grow by 3.9% in 2021 and by 2.6% in 2022.

The Bank’s headline consumer price inflation forecast averages 3.3% in 2020 and is lower than the previously forecast of 4.% in 2021 and at 4.4% in 2022. 

The forecast for core inflation is lower at 3.4% in 2020 and remains broadly stable at 3.7% in 2021, and 4% in 2022.  

“The economic contraction and slow recovery will keep inflation below the midpoint of the target range for this year”.
The bank’s inflation target has been between 3% and 6%. The governor added that “inflation is expected to be well contained over the medium term, remaining below but close to the midpoint in 2021 and 2022”.
Kganyago reiterated the bank’s stance that monetary policy cannot on its own improve the potential growth rate of the economy or reduce fiscal risks.

“These should be addressed by implementing prudent macroeconomic policies and structural reforms that lower costs generally and increase investment opportunities, potential growth and job creation. Such steps will enhance the effectiveness of monetary policy and its transmission to the broader economy,” he said. 

A portfolio manager at FNB Wealth & Investments, Wayne McCurrie, said that the decision was expected. “There is not much that interest rates can do.”

He said the 3% cut is “fantastic”, but it’s only now that the economy is opening up fully that lower interest rates will be beneficial in respect of job creation.


McCurrie said so far, lower interest rates have meant savings for consumers making monthly instalments on debt. Jeffrey Schultz, senior economist at BNP Paribas in South Africa, said he had expected a 25 basis cut because of the contraction in GDP, however, “the risks to a ‘no change’ stance are not negligible”.


Schultz said he believes any future decision on policy rate cut is unlikely to be unanimous and will be highly data-dependent, considering the sizeable fiscal risks in the system.

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

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

Related stories

Advertising

Subscribers only

How lottery execs received dubious payments through a private company

The National Lottery Commission is being investigated by the SIU for alleged corruption and maladministration, including suspicious payments made to senior NLC employees between 2016 and 2017

Pandemic hobbles learners’ futures

South African schools have yet to open for the 2021 academic year and experts are sounding the alarm over lost learning time, especially in the crucial grades one and 12

More top stories

Egypt, Seychelles get first jabs

The two countries have rolled out China’s Sinopharm vaccine, but data issues are likely to keep some countries from doing the same

Fashion’s future is bricks and clicks

Lockdown forced reluctant South African clothing retail stores online: although foot traffic in brick-and-mortar stores remains important in a mall culture like ours, the secret to success is innovation

What the Biden presidency may mean for Africa

The new US administration has an interest and much expertise in Africa. But given the scale of the priorities the administration faces, Africa must not expect to feature too prominently

Zuma, Zondo play the waiting game

The former president says he will talk once the courts have ruled, but the head of the state capture inquiry appears resigned to letting the clock run out as the commission's deadline nears
Advertising

press releases

Loading latest Press Releases…