Few would have predicted at the start of this year that South Africa would see big interest rate cuts, especially considering the notoriously hawkish South African Reserve Bank (Sarb) under governor Lesetja Kganyago.
The bank’s Monetary Policy Committee (MPC) only cut the repo rate by 25 basis points in January. However, since then it has effectively slashed the repo rate by 200 basis points and is eyeing five further possible rate cuts of 25 basis points over the next year.
The move comes as it looks to up liquidity in business and tries to put money back into the pockets of South Africans who are facing a major financial fallout from the global coronavirus pandemic.
On Tuesday, the Sarb surprised the market with a one percentage point repo rate cut. It comes within a month of the surprise 100 basis point cut at the MPC’s meeting on March 19. Most economists surveyed in early March were expecting a modest 50 basis point cut, considering the previously conservative policy stance of Kganyago and his MPC peers even as the South African economy slipped into a recession.
The decision in March was Kganyago’s first full one percentage point repo rate cut since taking office in 2014 and the Sarb’s first rate cut at consecutive MPC meetings since 2011. Tuesday’s further cut came after the central bank called an urgent early meeting of its MPC.
The unusualness of the move could be seen in the bank first announcing it on social media platform Twitter. Kganyago later said the plan was to announce the cut simultaneously on its website but technical issues prevented this.
Speaking on Tuesday, Kganyago said the MPC debated the matter over the Easter weekend as the decision to make the cut in March did not take into account the decision by government to put the country in lockdown, which happened after its last meeting.
The latest rate cut decision was reached unanimously by all members of the MPC and would take the repo rate to 4.25% per annum, effect from April 15.
The Sarb’s next MPC meeting was only scheduled to take place from May 19 to 21.
The move will see the repo rate reach its lowest level since 1973 and will result in SA’s prime commercial lending rate dropping from 8.75% to 7.75%.
While the move has been welcomed by business and many cash-strapped South Africans, pensioners dependent on interest from savings will not be happy, especially with further rate cuts on the cards.
“The implied path of policy rates over the forecast period generated by the [Sarb] Quarterly Projection Model indicates five repo rate cuts of 25 basis points extending into the first quarter of 2021,” Kganyago noted in his MPC statement on Tuesday.
“Monetary policy can ease financial conditions and improve the resilience of households and firms to the economic implications of Covid-19. In addition to continued easing of interest rates, the bank has taken steps to ensure adequate liquidity in money and government bond markets and to ease capital requirements to free capital for onlending by financial institutions. Each of these steps make more capital available to households and firms,” he added.
Kganyago, however, warned yet again that monetary policy could not 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 further reduce existing constraints on monetary policy and its transmission to lending,” he said.
His comments came as business leaders and economists were looking to Finance Minister Tito Mboweni’s Treasury briefing on Tuesday around a possible financial stimulus package from government.
Mbonweni, however, did not make any major announcements around such a package at that briefing.
Talks are underway with several multilateral financial institutions including the World Bank and New Development Bank. Mboweni may make an announcement later this week, following a cabinet meet scheduled for Wednesday.
Listen to Nompu Siziba’s interview with Sanisha Packirisamy, economist at Momentum Investments: