Reserve Bank again cuts repo rate by 1 percentage point; predicts 6.1{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} fall in GDP for 2020

The SA Reserve Bank has cut the repo rate by 100 basis points, or one percentage point. This brings SA’s repo rate to 4.25{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}. The cut will be effective from April 15. 

This comes after the bank brought the scheduled May meeting of its Monetary Policy Committee forward to respond to the impact of the coronavirus pandemic on SA’s economy. 

The repo rate is the benchmark interest rate at which the Reserve Bank lends money to other banks. The bank’s decision will also lower the prime lending rate to 7.75{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}. 

Reserve Bank governor, Lesetja Kganyago, said at a briefing on Tuesday morning that the decision by the bank’s MPC to lower the repo rate was unanimous. 

Kganyago said the bank now expects South Africa’s GDP in 2020 to contract by 6.1{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}, compared to the 0.2{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} contraction expected just three weeks ago. GDP is expected to grow by 2.2{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} in 2021 and by 2.7{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} in 2022. 

Tuesday’s decision was the second major cut in less than a month and the third cut this year, after the central bank cut the rate by one percentage point in mid-March. In mid-January the bank lowered the rate from 6.5{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} to 6.25{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}. 

The unexpected cut caused the rand, which had been firming during the morning, to weaken from R18.02/$ to around R18.30/$. 

‘Limited effect’

Following the announcement Peter Montalto, head of capital markets research at  Intellidex, told Fin24 that the decision would have a moderate impact on softening the blow for households and businesses.

He said South Africans were waiting for more aggressive response from the central bank to Covid-19.

“It will have relatively limited effect.

“The funding schemes are in the works, but this provides moderate support for the economy. We are still waiting for the bazooka, which is the central bank lending discounts and other assistance for banks and SMMEs,” he said. 

Extension of lockdown ‘severe’ for small businesses 

Kganyago said the decision to extend the nationwide lockdown by an additional two weeks to the end of April would have severe impact on small businesses. 

“Both the supply and demand effects of this extension reduce growth and deepen it in the short-term, as businesses stay shut for longer and households with income spend less,” he said.

“This will likely also increase job losses, with further consequences for aggregate demand. The impacts will be particularly severe for small businesses, and individuals with earnings in the informal sector.”

The decision to extend the lockdown was announced by President Cyril Ramaphosa on 9 April. Ramaphosa said at the time that South Africa was “only at the beginning of a monumental struggle that demands our every resource and our every effort”.

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