Economic recovery: Low rates are playing a starring role

But only recently. They take time to have an effect, and they need to stay low for a long time.
The extended low-rate outlook should encourage more risk-taking by firms. This is the best news low rates will have on the real economy. Image: Waldo Swiegers, Bloomberg

Effectively, the nominal repo rate is at its lowest level in 48 years in South Africa.

The last time South Africa had to lower interest rates to this level was during the Yom Kippur War and oil crisis of 1973.

Back then the policy rate stayed below 3.5% for less than 90 days before going to 3.78% and higher within a short space of time.

The last time the repo or policy rate stayed below 4% for over a year ended in June 1964. That’s nearly 57 years ago!

See chart below for the long-term history of the SA repo rate.


Moreover, the drop in the repo rate was quick.

The last time the repo rate halved in less than six months was at the back end of 1998 when SA recorded a central bank policy rate of nearly 22% during the emerging market crisis. The SA repo rate does not just halve, and it does not fall below 4% much either.

South African Reserve Bank (Sarb) rate action was decisive. Savers had a more challenging time, but they knew that lower rates would help the recovery.

But a low rate takes time to have an impact; it needs to stay low for a long time. Communication from the Sarb was vital, and the monetary policy made it clear that rates were to remain low for long. At times there were votes for even lower rates.

The interest rate impacts an economy only about nine to 12 months later.

On May 22, a repo rate of less than 4% will have been in effect in SA for a year.

I believe the rate will likely stay there for another few months. Sure, the rate will increase from the 3.5% level – but in small steps.

Other central banks are also starting to hint at small increases or long periods of zero rates and no further cuts.

At long last, the hoarding of cash declines

Business, or more correctly, the non-financial private sector, responded to the crisis by hoarding money out of fear.

Cash deposits by private firms went from 19% of GDP to 24% (partly due to hoarding and partly due to a decline in GDP). See chart below.


Cash deposits by businesses went from R874 billion in the first quarter to R993 billion in Q4. Fear drove company savings up by R120 billion. But since November, private sector cash deposits have declined R33 billion.

So a quarter of business hoarding has dissolved due to the repo staying low and the economy bouncing back.

The incentive to keep even more money in the bank was taken away as interest rates had more inferior returns than the return on assets the private sector made – mainly due to lower interest rates. Firms now want to employ their capital in their businesses again as economic activity returns (more on this aspect in the following section).


In March this year, consumers spent more on their credit cards for the first time in a year. Only just – but they did, and that would not have happened if rates did not decline for a long time.

As the pandemic and lockdown hit South Africa, consumers also got a fright which resulted in the fastest increase of deposits in at least a decade. Deposits by residents went from R3.97 trillion in January 2020 to R4.47 trillion a year later.

Yip, that is an extra R500 billion in deposits driven at least partly by fear and uncertainty.

But with a record low level of interest rates, consumers finally started spending those deposits in February and March. Remember, rates are not just there to encourage borrowing but also to promote some cash spending in times of economic distress.

In the first quarter of 2021, R30 billion left consumer deposits and was spent in the economy. Of course, more needs to be spent, but at least the excessive hoarding is over for now.

Again the level of the repo rate impacted on consumer behaviour, but only nine months or so later. The economic blow was softened over time. At least now, low rates on their own will impact stronger on economic growth. Consumer confidence is at least not as low as it was last year, and if no other lockdowns take place, the confidence could reduce the cash pile further. We are not talking credit here but actual money in bank accounts.

Combined, the consumer and private sector have just pumped back R70 billion into the economy – in about three months.

That I believe is faster than the government spent money on consumers and businesses last year.

The lower repo rate also helped firms and consumers who were highly indebted. Low rates gave consumers some breathing space, and gave companies a better chance of survival.

The repo rate will however have to remain low to increase credit extension again as the latest numbers there suggest the consumer is still scared of creating debt. Private sector credit declined at the fastest rate since May 1966!

Hoarding may be over, but private sector credit creation is still in decline. That is perhaps partly a function of government crowding out, but the low policy rates should positively impact credit creation. For this reason, I believe monetary policy will have to remain extremely loose. Yes, the rate will surely increase, but I expect that to be slower than usual as the shot in the arm needs time to work.

Private sector return on assets beat money market rate in Q4

Private business must decide where to deploy assets. Too many private sector assets in the banking system is not always a sign of economic health.

Business cash deposits at around 20% is a sign of low confidence and returns in an economy.

Company shareholders are probably more pleased as the return on assets for the private sector was higher than money market rates for the first time in six years in the fourth quarter of 2020.

As private sector companies have to make a return for their shareholders, one of the measures would be what can a shareholder get in interest in the bank. If bank interest is higher than the return on the assets deployed, it is onerous to make a case for more investments into the company rather than depositing money in the bank.

In the fourth quarter of 2020, for the first time since the first quarter of 2015 did the total non-financial private sector see returns on their assets that were higher than the bank rate.

On average, it makes sense for companies to invest in either human or fiscal capital again.

In the following chart, the three-month money market rate and the non-financial private sector return on assets are compared, and the decrease in interest rates is starting to have an impact as the rate of return improves while interest rates stay low.

The extended lowrate outlook should encourage more risk-taking by firms. This is the best news that low rates will have on the real economy.


SA also lowered its nominal rates far faster than the average emerging market.

The trend shows that the Sarb acted quicker than most, and dropped rates further. SA rates are also still lower than the average emerging market out there, which at present is a great thing.

Source: Federal Reserve and Sarb

While inflation will rise again due to big reserve-currency economies having very low rates, our Sarb can at least still leave rates low for a while – SA will not get punished for too-low rates in a low-rate world. There are very few places where inflation is lower than policy rates right now.

A good band-aid

In summary, low rates in an environment of economic turmoil are a good band-aid until confidence comes back and fear is diminished. Of course, it is not a permanent fix, and structural reforms are still needed in SA.

However, the central bank acted fast, far and long with its monetary policy, while the impact is only really being seen now. It is perhaps a bit early to raise rates again, but the medicine is working, and the hoarding of cash has stopped.

Also, inflation at least played along, as did the rand.

The economy also felt the positive impact of higher export prices.

And all the extra spending by the government and the Unemployment Insurance Fund (UIF) released well over a hundred billion of helicopter money into the economy.

But the more recent impacts are driven by lower rates rather than extra spending by government. This won’t last forever, but signs are that the economy needed that shot in the arm. It got it on time, and probably for long enough to make an emphatic difference.

The low rate saved much of the economy and will probably stay low for a long time to come, although maybe not as low as now.

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This is very exciting news and excellent news for all South African investors and Investments. I feel sorry for all those who took money offshore based on bad financial advisors advice and lost money purely on exchange rate. Biggest mistake.

Not really a mistake.

Selecting currencies is not as important as selecting assets.

Take as example Johnny chose pounds but went Glencore at its IPO date.
Same day, Jannie chose rands but went SAB.

I’m certainly not sorry that I moved money offshore when I could. I might have missed a bit of a profit opportunity offered by the current “strength ” of the Rand, which has nothing to do with the strength of our economy. The long term trend of decline is there for all to see and is inevitable as a result of the iron grip that the corrupt ANC has over the country. I would rather hedge my bets than speculate on how much longer the current Indian summer is going to last.

Yes, we fall in the same category as those Zimbabwean fools who took their money out of the country before the economic collapse.

It would only have been a mistake if people exchanged when the Rand was at its weakest and also if they did not invest overseas. I have emigrated the majority of my portfolio and my emigrated portfolio has by far outperformed my local portfolio. Although admittedly my local portfolio is mainly stuck in employer compulsory funds with limited choices and if I could choose my local investments I would invest it otherwise.

The main reason why some advisors and the reason why I emigrated the majority of my portfolio isn’t all to do with returns though as well, that’s only half the story. It is a form of hedge against an unsustainable local fiscal position and the radical implementations that the SA government will most likely implement to remain solvent.

If the SARB is forced to monetise the fiscal deficit while let’s say for example the RET faction of the ANC takes over government and spends like there is no tomorrow, there is a heavy price to be paid. This price will not be paid by the government, but will be paid in the form of inflation and currency devaluation by all who have any local holdings.

If you believe that the above scenario will never come to fruition, then by all means leave everything in SA. But if you see the increasing risks that wil lead to this situation realising over the medium to long term then you have to prepare accordingly.

Go look at the JSE returns vs overseas bourses over the past 10 years and think again.

Firstly depends on the time frame you’re selecting.

Secondly I’ve done just fine with some other currency investments. And as the rand declines over the next decade I’m pretty sure your opinion will be proven incorrect.

The current low rates are not sustainable and SARB is playing chicken with the devastating effects of inflation the longer it keeps them at historic lows.

There is a very negative after effect comming down the road that will hit harder the longer they keep rates artificially low.

Contrary to belief, central banks are the ones who print inflation. It’s called Expropriation Through Inflation,the theft of value by dilution.

The largest exporter of inflation in 2020 was the USA who printed 20% of all bank notes in existence last year.

Emerging markets. A good name for all country’s with all ills of glory for the few. All financial institutes. manufacturing to, of the non emerging markets, use them for anything, resulting in keeping the acquired emerging status. They function as the oil for the long time ago emerged in Columbus times. One major fact dividing the emerging is self supporting capability. Read Russia and swift. Without, they, the emerging, are acting as the old historical vassals in colonial times. Rates, up or down, in emerging markets, needs approval from established outside markets. Going it alone is out of the questing. Ask former local president F de Klerk.

And just don’t forget 1999 when interest rates on a home bond were 19%. It means nothing rates are so low. They can move upwards uncontrollably AT ANY TIME NOW. So enjoy these timed articles.

In 1998 those rates went up to 25%.

I remember, and that was with strong economic fundamentals and lowish unemployment. Very different times now. The banks are running a fine line. But they certainly don’t have much choice do they?
Fun starts when the music stops and there are a couple of chairs less.

Low interest rates are also artificially driving up house prices – since people are foolish enough to see “how big a bond they qualify for” before buying. Whoever borrows now, must make sure they calculate what those bond instalments will be should the interest rate goes up by 2 or 3%.

Very valid point, i couldn’t agree more!

Sound advice

I agree but then that has always been the case. I recently -after 14 years – brought another car and my bank Absa gave me a choice immediately for fix interest or float. the difference was a little over 1%.

SO I can decide and these days there are more product choices – although not sure one can get a 20 year fixed rate but certainly from the story of my car five years or six maybe too.

I remember people losing their homes when rates went up to 25% in 1998 and then buying back in again in say 2006 when banks gave everyone and his pet a loan.

So cycles are always there and buyers must beware. But certainly back to early 1990s when I brought my house – now we have choices on rates. the bond agencies also improved competition up to a point. So yes rates can go up but you can fix more than before and the fixed rates are not that much higher than they were compared to floating say in 1999.

But very good point buyer beware

The rates go up because of rising inflation. Wages increase along with rising inflation, all being equal. Property values are a function of inflation over the long term. So, the investor will pay more if interest rates rise but the value of his house and his ability to cover the bond will also increase. I suppose it comes down to the real rate. When the real rate is negative it supports asset values and forces investors to borrow.

Low real rates are a mechanism that distributes asset value from the unindebted saver to those investors who are geared through debt. By taking on a productive debt we align ourselves with the position of the government. Government has the power to inflate itself out of a precarious position. They plunder the purchasing power of the government bond in this process. The saver pays down the government’s debt over a period of 20 years.

We should consider the possibility that it is impossible to protect our net asset value over decades without taking on debt to buy assets that outperform inflation.

Financial markets are cyclical. Low rates will be short lived. Global inflation will rise and result in interest rate hikes as a result of
unprecedented monetary stimulus. Just the fear of higher inflation will cause the biggest stock market crash in history. We are a few months away from the top. The rand strength will also be short lived as SA political and Eskom realized risks that will fuel the depreciation of the rand, not to mention foreign speculators withdrawing portfolio investments from EM markets shortly. The rand will weaken against other currencies over the long term. Most wonderful opportunity now with strong rand to get into offshore low equity/cash funds and wait for opportunities while the market corrects.

Ja but please bring on that market slap soon! Feel like an idiot in cash waiting for the crash

Any economy that is built on artificially low rates is doomed. This article appears to have been written by an over indebted individual with the desperate hope that interest rates will stay low for ever enabling him not to drown in his debt. Get real and let interest rates be determined by economic principals which will benefit the saver and discourage individuals over indebting themselves. Think about the double whammy on the retired who now have to live on these lower rates and an ever increasing inflation because they are apparently no longer employable.

The author is Mike Schussler, one of the most senior and best economists in the country. I agree with the rest of your comment.

Currency movements transfer the record-low interest rates in the USA across the globe. Rand strength puts the brake on inflation and allows lower rates. The USA is in a financial repression environment where they have no option but to manipulate the interest rate on bonds to be lower than the rate of inflation. The real interest rate in the USA will be negative for the next decade, and this will cause inflation in every nation that uses the dollar as a reserve currency.

That is not necessarily a bad thing, because this is the only way we will get GDP growth to shrink the bad debt/GDP ratio.

1. Even the most esteemed scholar in Keynesian economics (anyone who believes in MMT) is still fundamentally mislead.
2. I agree that a weakening dollar could increase nominal GDP in developing countries – but do you really think we will lower our debt:GDP ratio? Do you think our government has the fiscal responsibility to do that? Their track record says they don’t

For many pensioners who have to allocate a certain amount to cash or quick convertible assets the low interest rate has been killer.


Some have found new asset classes like crypto and might never return to SA cash etc. Risky?? Yes!

But with the rates the low as it is now you are dead in the water anyway. Take a bit of risk and get double the repo rate on a USD stable coin.

Why not!!!!

Because 2018. Go and look at the graph of bitcoin from 1 January 2018 to 31 December 2018.

Gravity always wins. Nothing can keep on going up forever, especially a speculative gamble that has nothing of real economic utility behind it, such as crypto.

Looking at SA we must try and carry the low interest rate through!

Our currency is basically 5y to 6y flat

We have the lowest cost of capital in two decades.

We have a good outlook on balance of payments given commodities and agriculture.

This should be when we see fixed capital formation and jobs growth. It is hard on savers but we need this for next four years.

it is not clear from the graphs how much incremental spending is taking place over the indirect correlation of eco activity and savings? It is however good to notice the momentum as a sign of regained confidence.

“In the first quarter of 2021, R30 billion left consumer deposits and was spent in the economy. Of course, more needs to be spent, but at least the excessive hoarding is over for now.”

What Keynesian nonsense. What matters is *production* in the economy – are the costs of production coming down and is productivity going up. Not what is spent by consumers.

Pulling future tax revenue into today’s economy (deficit spending) is not the solution to a government-made crisis (destructive lockdowns and inefficient public sector spending on nonsense during the pandemic). And the Reserve Bank will not raise rates because the government can’t possibly pay back the interest on the massively increased debt. Same checkmate-problem that all central banks are currently in.. Their only way out is to inflate away the debt by destroying the value of their currencies. It’s a race to the bottom.

Protect yourself with inflationary-hedging assets, and don’t buy into over-valued bubbles like crypto and Tech stocks.

Totally agree. Value stocks in Japan, Israel. India. Russia. Agricultural stocks. Niche real estate. Businesses with good cash generating products and solid balance sheets that generate growing dividends. Singapore dollar. Select gold, silver and uranium stocks. Private placements. Your own business or side hustle. Gold backed crypto that earn more gold backed crypto. Staked stable coins at high rates. It’s a pleasure.

My comment not negating Keynesian support per se. No point in living in a secure estate if you have to travel in an armoured convoy to buy milk and bread at the nearby Mall.

End of comments.





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