Repo rate slashed by 1%

Bold monetary policy move meant to act as a stimulus measure.

South Africa’s repo rate has been slashed by 100 basis points or 1% to 5.25%.

This was announced by South African Reserve Bank (Sarb) governor Lesetja Kganyago on Thursday in a similar move to other central banks around the world as the economic fallout from the global coronavirus outbreak gets worse.

Kganyago’s most aggressive repo rate cut since taking office in 2014 follows the conclusion of the Sarb’s three-day Monetary Policy Committee (MPC) meeting in Pretoria.

The cut will take the repo rate – the rate at which the Sarb lends money to commercial banks – to its lowest level since late 2013. It will see SA’s current prime commercial lending rate drop from 9.75% to 8.75%.

“Globally, a once-healthy economic growth outlook has been revised down sharply due to the outbreak and spread of Covid-19. This coronavirus will negatively affect global and domestic economic growth through the first half of 2020, and potentially longer depending on steps taken to limit its spread,” Kganyago said in his post-MPC address.

He noted that the domestic economic outlook remains fragile.

“At this point, Covid-19 is likely to result in weaker demand for exports and domestic goods and services, but its impact on the economy could be partly offset by lower oil prices. We also expect disruptions to supply chains and to normal business operations. The bank now expects the economy to contract by 0.2% in 2020. GDP growth is expected to rise to 1.0% in 2021 and to 1.6% in 2022,” he added.

Kganyago said heightened risk sentiment in global markets has amplified domestic and fiscal risks.

“This has pushed South Africa’s sovereign bond yields sharply higher and weakened the domestic currency, increasing risks to monetary policy. The steep drop in global interest rates implemented by advanced economies in recent days has partly offset those risks,” he said

“Despite the general rise in risk, the significantly lower forecast for headline inflation has created space for monetary policy to respond to the rapid deterioration in economic conditions. Barring severe and persistent currency and oil shocks, inflation is expected to be well contained, remaining below the midpoint of the target in 2020 and close to the midpoint in 2021,” the governor noted.

“Against this backdrop, the MPC decided to cut the repo rate by 100 basis points. This takes the repo rate to 5.25% per annum, with effect from March 20, 2020. The decision was unanimous,” said Kganyago.

Senior research analyst at Pam Golding Properties, Sandra Gordon, points out that there are “meaningful monthly savings” to be had as a result of the 100 basis point interest rate reduction.

“For a homeowner or buyer with a R1 million mortgage, the cut represents a saving of around R648 per month as calculated by ooba. On a R2 million mortgage, a monthly saving of R1 296 can be expected,” she says.

The cut will also ease the monthly payment for those who have car loans and credit card bills; however, it will hurt pensioners who have standard savings in the bank.

 

Read the full statement by the MPC:

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank

Since the January meeting of the Monetary Policy Committee (MPC), the Bank’s forecast for inflation has continued to moderate, in line with monthly inflation data and recent lower oil prices. Globally, a once-healthy economic growth outlook has been revised down sharply due to the outbreak and spread of Covid-19. This coronavirus will negatively affect global and domestic economic growth through the first half of 2020, and potentially longer depending on steps taken to limit its spread.

The Covid-19 outbreak will have a major health and social impact, and forecasting global and domestic activity presents significant uncertainty. The Chinese economy, where the virus originated, is expected to contract by 1% in the first half of 2020.

Economic activity is likely to also contract in the United States and Europe as governments there take actions to contain the spread of the virus.

In financial markets, the sustained global bull market in equities and corporate bonds also ended dramatically last week, with extensive and deep repricing. Prices for emerging market sovereign debt and other risky assets also fell sharply. This will have repercussions for household wealth and income, impacting further on global economic growth.

In response to all these developments, the US Federal Reserve, alongside other central banks, took various steps to provide further monetary accommodation. Additional steps have also been taken to provide liquidity and ensure the smooth functioning of markets. Some governments have taken fiscal measures to mitigate the economic effects of the virus.

In light of these considerations, we have marked down global growth for 2020 to 1.1%, before rising to around 2.8% in 2021. While a deeper or longer global and domestic contraction is not in our baseline, the Committee did consider a scenario featuring that
possibility.

Prices for some commodities have fallen as a result of weaker demand globally, with copper and oil being particularly hard hit. The spot price for Brent crude oil is currently around $30 per barrel, but is expected to bounce back to higher levels. For our forecast, the Brent crude oil price is expected to average $40.4 per barrel in 2020 and $44.5 per barrel in 2021, well below previous assumptions.

The domestic economic outlook remains fragile. At this point, Covid-19 is likely to result in weaker demand for exports and domestic goods and services, but its impact on the economy could be partly offset by lower oil prices. We also expect disruptions to supply chains and to normal business operations. The Bank now expects the economy to contract by 0.2% in 2020. GDP growth is expected to rise to 1.0% in 2021 and to 1.6% in 2022.

Apart from the Covid-19 global pandemic, electricity supply constraints and other sources of uncertainty are expected to keep economic activity muted. Public sector investment has declined and job creation has slowed. Business and household confidence have weakened further. Government and household consumption, and private investment, however, continue to grow, albeit modestly. While export growth is expected to decelerate further in the near term, prices remain high for some export commodities, and could be supported by an early resumption in China’s economic activity.

The technical recession of the latter half of 2019 contributed to a lower economic growth forecast. In addition, Covid-19 and existing constraints such as load shedding, imply significant downside risk to the forecast. With persistently low inflation, and the coronavirus now hitting economic activity, monetary policy in major advanced economies and China will likely remain accommodative over the medium term. Easy global financing conditions have previously supported the value of the local currency, but financial volatility and a sharp rise in perceived risk has caused the rand to depreciate by 17.2% against the USD since January. The implied starting point for the rand forecast is R15.30 to the US.

The forecast deducts 0.5 percentage points from 2020 GDP for load shedding, at stage 2. MPC Statement 19 March 2020 Page 4 dollar, compared with R14.90 at the time of the previous meeting. The forecast shows the currency strengthening over time, recovering towards its longer-run equilibrium level.

The Bank’ s headline consumer price inflation forecast averages 3.8% for 2020, 4.6% for 2021, and 4. 4% in 2022. The forecast for core inflation is lower at 3.9% in 2020, 4.3% in 2021, and 4.4% in 2022.

With the downward revision to the forecast, the overall risks to the inflation outlook at this time appear to be balanced. Electricity pricing remains an immediate concern, and there is likely to be higher volatility in prices of other goods and services as a result of sharp changes in demand and supply. Risks to inflation from recent currency depreciation are expected to be muted as pass-through is slow and could be offset by a wider output gap. Food price inflation is expected to remain low, in part due to better weather conditions.

Expectations of future inflation have moderated further, on the back of lower services prices, modest food price inflation, and slower-growing nominal wages. Across the different surveys we look at, inflation expectations currently average 4.4% for 2020, 4.6% for 2021 and 4.7% in 2025.2 Market-based expectations have also moderated, with five-year break-even rates currently at about 3.90%.

Heightened risk sentiment in global markets has amplified domestic and fiscal risks. This has pushed South Africa’s sovereign bond yields sharply higher and weakened the domestic currency, increasing risks to monetary policy. The steep drop in global 2 The latest Bureau for Economic Research (BER) survey has expectations for 2020 down by 0.4ppts to 4.4% and to .4.6% (from 5.0%) for 2021. Five-year-ahead inflation expectations also eased to 4.7% (from 4.9%). Market analysts (Reuters Econometer) expect inflation to be, 4.2% (from 4.4%) for 2020, 4.6% (from 4.7%) in 2021 and 4.5% (from 4.6%) for 2022.

Calculated from the break-even inflation rate, which is the yield differential between conventional and inflation-linked bonds.
MPC Statement 19 March 2020, real interest rates implemented by advanced economies in recent days has partly
offset those risks.

Despite the general rise in risk, the significantly lower forecast for headline inflation has created space for monetary policy to respond to the rapid deterioration in economic conditions. Barring severe and persistent currency and oil shocks, inflation is expected to be well contained, remaining below the midpoint of the target in 2020 and close to the midpoint in 2021.

Against this backdrop, the MPC decided to cut the repo rate by 100 basis points. This takes the repo rate to 5.25% per annum, with effect from 20 March 2020. The decision was unanimous. The implied path of policy rates over the forecast period generated by the Quarterly
Projection Model indicated three repo rate cuts of 25 basis points each in the second and fourth quarter of 2020, as well as in the third quarter of 2021.

Monetary policy can ease financial conditions and improve the resilience of households and firms to the short-term economic implications of Covid-19. Our decision and its magnitude seeks to do this in the near term. Monetary policy however cannot on its own improve the potential growth rate of the economy or reduce fiscal risks. Current economic conditions underscore the importance of implementing prudent macroeconomic policies and structural reforms that lower costs generally, and increase investment opportunities, potential growth and job creation.

The risk premium starting point increased from 3.2% to 3.8% since January, driving up the neutral real rate by 20 basis points and currency contribution to the neutral by 10 basis points. The weighted global neutral real rate estimated in the QPM fell by 50 basis points, resulting in an overall decline in the neutral by 20 basis points.

Global economic and financial conditions are expected to remain highly volatile for the foreseeable future. The Committee will continue to assess risks to inflation, including from weaker economic growth and those arising from wage, price pressures and currency depreciation. As usual, the repo rate projection from the QPM remains a broad policy guide which can change from meeting to meeting in response to changing data and risks.

Lesetja Kganyago
GOVERNOR
The next statement of the Monetary Policy Committee will be released on 21 May
2020.

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COMMENTS   35

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Excellent!!!!!

This won’t make any difference to our competitivity.

Why exactly?

Tell me what difference it is going to make, except for weakening our currency and ability to afford imported critical goods like oil and stoking inflation, that risks getting out of control.

Excellent indeed for today…
I think we can find each other, by year end we must be below 4.5%. That will increase not only the economic momentum but individual and business appetite in credit utilization on the backbone of an eased repayment regime.

Sounds like you have alot of Credit

The economy has ZERO momentun (positive) so why would this cut stimulate appetite for credit. For once I think even Mike Schushler is talking k@k.

Now, the mark-up of 3,5% between the SARB Repo rate and the prime overdraft rate of the commercial banks needs to be slashed as well to at least a mark-up of no more than two percent in current conditions – so as to bring about much needed relieve in respect of financing charges as well as to contribute to re-ignite the declining and contracting economy.

mmm. So monetary policy will help with what parts of the crisis?

Encourage house buying?
Encourage more borrowing from the bank?

Does the SARB realize banks won’t be passing on the cheap money since they’re experiencing a credit crunch and their loans are already turning sour.

The only part that makes sense is adjusting for deflation (at the expense of savers).

The Banks have recked up a lot of Debt.

Their customers are borrowing equivalent to what they earning. Living beyond their means.
Living a life of style…. well Style is about to come to an end.

Credit is the life blood of the bank… so they have pushed this excessively in the past 12 months.

The problem now… is the instantaneous shift of reality…. everything is coming to a standstill
We are going to see Defaults rise…. insiders know this…. have a look how bank shares.

Im not sure what the Governor (maybe add his 2 cents and look good) is trying to do.
But the Economy is pretty much at a standstill … not sure how an interest cut will help increase spending in a high inflationary environment (his inflation measure is not accurate by the way)

Not nearly enough – most of the developed world is zero !!!

Inflation in SA is also heading to zero – no production, huge unemployemnt numbers coming through as of today (every restaurant and pub laying off staff) – every business laying off staff.

Almost every SME will halt next week !

And we cut rates by 1% REALLY ????

Who cares about inflation when a country is about to go into complete lock down

You need to understand that the SARB has a certain mandate, and their mandate is not to sort out economic growth and economic reform issues. The SARB is one of the few institutions in the country that is doing their job (according to their mandate), properly.

R20 to the dollar , here we come !!

Remember, the rest of the world have also decreased interest rates. The first world have no rates left!

Exactly, so why go in the same direction?? Why??

Quote,
rate drop from 9.75% to 8.75%.
This will help the investor in zero rate environments falling on knees, saying thank you. To who is unknown and subject to ancient aliens stuff.

You OK. What are you saying?

Read again.

This will do nothing for the markets and even less to sort out Covid-19!

However it will do alot for the vulnerable fellow South African who is currently being crushed by this worsening economic crisis.

Wait until you are in lockdown like we are here in the EU, and see what wonders this rate cut will do. Prepare for the worst in SA.

It is what it is. Chill.

You guys know how to write a headline! Slashed??? I think a 3% cut is a “slash”, this is a “dribble”!!

Wait until you are in lockdown like we are here in the EU, and see what wonders this rate cut will do. Prepare for the inevitable in SA.

To many of you that commented above. Have you not seen the problems that the US/Europe created for themselves with the loose monetary policy they followed? Do you know where RSA would have been if it were not for the prudence of our reserve bank and the fact that they stick to their mandate and don’t bother themselves with politics or outside pressure?

SARB’s “prudence” makes no difference. SA has huge problems anyway and would be in no worse position than it is in now even if SARB had followed slightly looser monetary policy. Notice how the ZAR has sold off at the first sign of real trouble even though SARB thought they could or were protecting the ZAR?

Show me a currency that hasn’t sold off against the dollar? I’m not just talking EM, but GBP, EUR, all of them! This is not about rand weakness, its about dollar strength due to liquidity problems and demand for dollars.

Right, it’s all going really well! On the one hand we have low inflation and on the other – a recession, a currency heading south fast, a non investment debt rating, minimal GDFI, historically low levels of business & consumer confidence……………………..

Johan, you are correct of course. Your view is the textbook version, but the textbook was used as toilet paper in this pandemic. We are in the midst of an international currency war. Competitive devaluation is the name of the game. Our Reserve Bank is sitting on the bench, but our economy is part of the game. The business environment is internationally competitive. We are competing internationally, whether we like it or not.

Now, what happens when your Reserve Bank is “prudent” while the Reserve Banks of your competitors are acting irresponsibly? Your country, through your relatively high interest rates, is then importing their deflation. The countries with negative real interest rates, especially those who print a reserve currency, export their deflation to countries with a positive real interest rate.

It ain’t of much use if your currency kept its purchasing power when most people are unemployed, unable to enjoy the purchasing power of the currency. There is a tradeoff here. That is why they call this an international currency war, and our GDP growth rate proves that we are losing this war.

Whichever way around the economy, we are a small country comparing to the rest, our biggest problem is our policies. We tend to swing to far to the socialist side of thinking, creating more uncertainty. The countries printing money have very clear policies around their economic principles.
Not easy for us to balance economic growth with our policies.

Our GDP growth rate problems have less to do with a global currency war than self-inflicted own goals. Things like corruption and crime destroy competitiveness and the viability of businesses. Lack of protection against cheap Chinese products being dumped means manufacturing and textiles have been decimated. Intransigent labour that demands more and delivers less, and a government that treats businesses like the enemy, helps destroy business

A rate cut cannot fix the virus epidemic, unemployment, poor labour laws or ANC policy dysfunction that stifles any economic venture.

Cheap money – only good for those with debt!! Poor retirees.

It would appear that one group of citizens is not being considered. Pensioners. This 1% rate cut will reduce my interest income by 14.6%. Given that this one is 71 in the shade i am facing 2 health challenges – physical maybe but financial definitely. The emphasis is always on borrowings (debt). I have lived for 30 years of my life with no debt on the balance sheet. Save up for cash patiently rather than jump into hot water. Banks take our deposits for perhaps 7% at best and then lend it out to others (or onesself) at anything up to 21%. Go figure. The responsible are penalised for the sake of the irresponsible.
Banking, like taxation, is legalised theft. Neither banks nor government own any money. It actually ‘belongs’ to Joe Bloggs.

Thanks to the ANC (€1 = R18.65) my wife and I are now officially Rand-multimillionaires. Foresight had caused us to move the funds long before even mr Heystek though to push that narrative. Now we observe from afar the developments in the land of wasted milk and honey. “I love it if a good plan comes together” a la The A-Team.

End of comments.

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