Economists welcome interest rate cut

Lesetja Kganyago
Reading Time: 3 minutes

Most economists have welcomed the Reserve bank’s decision to cut the repo rate by a full percentage point. Some economists were expecting the bank to reduce the interest rates by half a percentage point.

The Bank’s Monetary Policy Committee took a unanimous decision to cut the interest rate by a full percentage point to curb the impact of the current recessionary environment. It cited the favourable inflation outlook due to lower oil prices for its decision to cut.

The Reserve Bank says it expects the economy to contract by 0.2% in 2020 and recover to 1% growth in 2021.

However, Reserve Bank governor Lesetja Kganyago warned that electricity supply constraints remain a risk to the inflation picture.

SABC analyses the Reserve Bank’s decision to cut the interest rate. 

Chief economist at Standard Chartered, Razia Khan, says a cut is a step in the right direction.

“The market has been pricing n close to 50 bps. Our own SARB view has been revised in recent pat but on reflection, we think 100 bps was fully justified. SA is now faced a health emergency with coronavirus is difficult to forecast with great accuracy where growth will come from. The economy can face a full contraction on a full-year basis of relatively small contraction of 0.2%.”

Economists say the Reserve Bank’s rate cut will provide a temporary reprieve to consumers and the economy as the coronavirus continues to spread around the world.

BNP Paribas Senior Economist, Jeff Schultz, says the cut will not provide substantial support for the struggling economy.

“It can help to cushion some of the blow to the economy. For every 25 bps that the SARB delivers, it adds about 0.1% to the economy. We are not talking about a game-changer for growth this year, but over the next 12 months it could add up to half a percentage point to GDP. It is not massive but also not insignificant…We do think this is a step in the right direction, but to create more jobs, we need the global economy to be fairing much better which for the next six months looks unlikely.”

Some economists have urged highly indebted consumers to use the rate cut to consolidate their debts.

More reaction to repo rate cut: