Repo rate: How big a cut?

Reserve Bank governor Lesetja Kganyago may surprise the market with a repo rate cut of 100 basis points or more say some economists and business leaders.
Lesetja Kganyago, the governor of the South African Reserve Bank, will have much to contemplate at the bank's Monetary Policy Committee meeting, which will conclude on Thursday. Image: Moneyweb

The South African Reserve Bank (Sarb) will cut the repo rate later today (Thursday) when its Monetary Policy Committee (MPC) meeting in Pretoria concludes.

But, the crucial question is whether it will be slashed by 100 basis points or more to give the country’s recession-hit economy and South Africans a significant enough tonic in the face of the financial fallout of the global Covid-19 pandemic.

Read: How much could Covid-19 impact the SA economy?

The Sarb has been hawkish on interest rates for some time and has only cut the repo rate by 0.25% or 25 basis points twice over the last year – in July 2019 and at the MPC’s last meeting in January this year. In fact, the last time the MPC cut rates at consecutive meetings, according to Bloomberg, was back in 2011.

Graphic: Bloomberg

Even before the Covid-19 outbreak, the bank’s conservative monetary policy position has drawn criticism, not just from a few politicians, but several business leaders, academics and even economists.

Although recent surveys of economists suggest consensus around a 50 basis point cut this time around, there are those that say Reserve Bank Governor Lesetja Kganyago will surprise the market with a repo rate cut of 100 basis points or more.

“Considering where we are right now and what’s happening in the world, there is no better time to cut the repo rate much more aggressively than the Reserve Bank has done in the past,” independent economist, Mike Schüssler, tells Moneyweb.

“A cut of 1% or even more could be on the table, especially because the Sarb now has more room to make such a bold move. This comes as other central banks around the world have made big rate cuts to try to mitigate the impact of the global coronavirus outbreak on their economies,” he adds.

Michael Jordaan, the erstwhile CEO of FNB and now a backer of BankZero (one of SA’s new digital banks), has been very vocal on Twitter over the last year, advocating for bigger repo rate cuts from the Reserve Bank to boost the economy.

On Wednesday he called on Kganyago to cut the rate by 1%. Since his appointment in 2014, Kganyago has never cut the rate by more than 25 basis points following an MPC.

Speaking to Moneyweb he says South Africa needs massive monetary (policy) and fiscal responses to the crisis, which should include an interest rate cut of as much as the US Federal Reserve’s recent 1% cut.

“These are extraordinary times that require equally extraordinary responses while we bring the virus under control… There is a massive structural change in both supply and demand in the real economy. Normal rules don’t apply anymore. We need to be bold in cutting rates, cutting taxes and providing direct income grants to citizens,” he adds.

Jordaan reiterated his views that funding to “zombie” state-owned enterprises (SOEs), such as SAA, needs to stop. “This is a time to support citizens rather than to ideologically pursue state ownership,” he says.

Efficient Group’s chief economist Dawie Roodt agrees with Jordaan on SOEs like SAA and SA Express. “Now is the time to let them go, especially considering how South Africa’s fiscus is under even more strain due to the coronavirus.”

He believes there needs to also be monetary policy measures to help mitigate the economic ramifications of the global pandemic. However, Roodt says that the country can’t afford to have burdens on the fiscus, whether it is SAA or a bloated public wage bill.

On the repo rate, Roodt says that the market seems to be pricing in a cut of 75 basis points. “However, given the situation in the country, I believe a 100 basis points cut is very likely,” he adds.

“Our Reserve Bank governor has built up a reputation as a conservative central banker… This is not such a bad thing, because he has now accumulated a lot of dry ammunition. The Sarb is in a position to now aggressively slash the repo rate by up to 100 basis points,” Roodt points out.

“I don’t think they will go beyond that, but even a 1% cut is not going to save the economy. We will need to have some sort of fiscal stimulus too, as our economy was in recession even before coronavirus emerged,” he says.

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Eish!

Pensioners under attack from all sides.

Quite frightening as pensioners need income & have no way of replacing lost Capital: The Fund Managers however continue to take their Management fees whilst watching their clients Pensions vanish down the tube !

If an advisor has given you advice to draw your income from a fund exposed to equity, you should fire him. Income should be drawn from income funds and the advisor should review his client’s investments to advise them when to rebalance their funds to continue receiving an income. With enough funds in their income funds pensioners should be able to continue drawing an income while waiting for the market to recover.

I too have an elderly parent and she’s increasingly becoming dependent on me and my wife, so I have absolute sympathy. I do think though that, as Magnus Heystek points out, traditional retirement is becoming more and more of an impossible dream. People are stopping working way too early, and living far too long for their meager savings to last long enough.

Agreed. Magnus is right. He is also right in saying take everything you have offshore. Some pensioners left some money behind in fixed income instruments as it does (or did) give a return quit a bit above inflation. If this changes I don’t see why people will still invest in these.

Maybe just take the balance also?

In real terms, oil is the cheapest it has ever been. The same goes for wheat and maize. Our real interest rate is the highest on earth, that is why our unemployment rate is also the highest and why we are experiencing an economic contraction and a crashing real-estate sector. The real interest rate is negative in the larger economies. Our relatively high real interest rate destroys our ability to compete.

Investors buy our bonds, they fund Luthuli House, but they do not build factories or mines. The Reserve Bank takes the growth out of the economy and the paycheques of the unemployed to bribe foreigners to lend to Luthuli House. The Reserve Bank is choking the economy as part of its effort to sustain Luthuli House.

You can never develop off the back of a rapidly depreciating currency!

Dear S -normally you talk lot of sense but the interest rate does not cause unemployment or economic growth and all the other problems in our country. The corrupt ANC &F&F have destroyed the economy as you have pointed out on numerous occasions. High interest at least keep our currency kind of stable.Low interest rate punishes those who save and live within their means and benefits the SARB Master’s voice-the ANC govt -with lower interest payments on the massive debt.

Sensei???? Really are you trying to tell me that the ANC are the only beneficiaries of bond investment in SA. You have just turned my positive respect for you to very, very negative.

I never come here looking for respect. I come here for a debate. The kind of intelligent debate by commentators like RichardtheGreat, MichaelfromKlerksdorp, Griet, comme ci comme ca and many more. The kind of intellectual debate without getting personal.

I am waiting for you to explain how the economy and the average citizen benefits from the high debt/GDP ratio and the budget deficit. Both are the result of socialist policies. We have even reached the point where they want to expropriate pension funds.

I say again – I don’t need your respect. I want your view.

By just signaling a rate cut the reserve bank has deflated our currency to the extent where any gain from a lower oil price is GONE.

Why cut when you need to keep a currency stronger for paying for oil and attracting investment.

They may as well raise rates. Why just do what the rest of the world is doing.

…can you even read what you just wrote there? read slowly.

Your moneygone.

How about the banks cutting their markup on the repo rates to the public? They get the money at 7% and charge the public 10% that is almost 50% profit

Irrational Exuberance is now with us – but is it here to stay?

Truth be told, but I don’t believe a lot of people actually know where the currency market is going, more than they know where interest rates and the stock market is going.

At this point, I think the financial market collectively has a greater probability of going down than up – the corona virus facts look very different than investor perceptions. Gone are the days that we believed that our portfolios (pensions etc.) had a higher probability of being worth more in the future, even with an appropriate level of risk.

At the moment the US Dollar is king and rising against all major currencies and commodities, hence my view now that the carry trades that kept the Rand relatively steady during the last three years. Who in his right mind will now sell US $ and buy emerging market currencies that have a positive carry of more than 2 % annually when the currency can crash against the US $.
Therefore, I think the Reserve Bank governor Lesetja Kganyago should surprise the market with a repo rate cut of more than 100 basis points as an emergency measure. Gone are the days that the committee was scrambling to make sense of a complicated scenario and expected to act rational in a market that is now driven by nonrational behavior.
Furthermore, the greatest future economic challenge on the international front will be the aging of millions of ‘’baby boomers’’. It’s frightening to know that retirement is no longer on the distant horizon. The financial demands on the system due to the social security issues, with so many people turning sixty during the last 10 years.

With due respect Mr Governor, South Africa’s repo-rate/interest rates are unjustly too high… Anything above 4,5% anywhere in the world kills economic momentum.

Paying too much towards debt, whether careless or productive debt, leaves citizens with too little to be creative. It shrinks economic activity… it creates a situation of buying 1 instead of the usual 5 items in the economy. Release the shackles, let the people buy.

Let us forget what the text books in economics classes are saying… We plead for practicality. We will visit economic principles when things are a bit relaxed.

Get a life and at least some economic education.

….troll

If we keep saying it… They will reduce the rates.

Get your education that you cant pay for… What use will it be for you when you are indebted to the tilt?

Explain?

There are vociferous big wigs, ex big wigs and various economists who keep advocating lower interest rates for us. South Africa will very likely not become an investors/business paradise with the high growth rates that these experts predict for lower interest rates:
1. There is the effect of lower interest rates for for savers, less income = less spending.
2 The inefficiencies of unproductive salaries impact on the fixed cost of a company is probably more than the impact of lower interset rates.
3 The investment of new capital in production is hampered by EWC and all the other nonsense and a lower interset rate will have little impact.
The fancy graphs showing these massive increases in our GDP, based on a lower interset rate, is driven by the suspect assumptions used in the calculations.

I agree 100%. The SARB has just hurt our currency without fundamentals in place this reduction will only be sending the ZAR to 20 and more. Waiting for JUNK status, poor ZAR. If you don’t have a decent currency you have nothing. Amazing how CEO’s and economists could have supported this !?

That would be silly.

Governor…. Silly question…. But are you trying to spur any sort of stimulus?
The Economy is knackered …businesses are closing…ask Massmart (Walmart could get zero interest loans in the US … an infinite number of loans) …
I doubt you will have any impact.

the more I think about it …. you have very little control of this economy…. neither does the government … the coronavirus is on its war path…. an it aint going away for a while…

what will happen is that this virus will bring a cleansing to the economy….clean out the muck.

There are all sorts of theories about monetary policy and interest rates and it is very much blah blah blah. This article highlights that government has no real power in the face of this maelstrom and only one little lever to pull. The only real thing they COULD do was shrink government, cut away all SOE’s, lower taxes and hammer crime and corruption and then let us guys fire up this economy like a rocket. Sadly they didn’t teach that at the Karl-Marx Institute for Value Destruction, Blue Lights and Poverty Creation

End of comments.

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