In what is likely to be a piece of good news for indebted consumers this Thursday, the Reserve Bank reduced the repo rate by 50 basis points to 3.75%, meaning the prime lending rate by banks is now 7.25%. Indebted consumers will pay less on their debt instalments.
The Central Banks says the easing of the lockdown regulations will help support growth in the near term. It, however, says getting the economy back to pre-pandemic activity levels will take time.
Economists have welcomed the repo rate cut by 50 basis points.
The Monetary Policy Committee has cut the repurchase rate by 50 basis points, bringing it to 3.75% per annum, with effect from 22 May 2020. #MPCStatement #MayMPC pic.twitter.com/2Rgz72SJkE
— SA Reserve Bank (@SAReserveBank) May 21, 2020
Briefing the media, Reserve Bank Governor Lesetja Kganyago said that the central bank expected South Africa’s GDP to shrink by 7% in 2020. In April, the bank had predicted a 6.1% fall in GDP.
The move will bring further relief to South Africa’s battered economy, most of which is still under lockdown.
Director at Merchant Afrika Lavan Gopaul says the markets were anticipating a further reduction of the interest rate.
“While the markets were anticipating a further reduction in the interest rate, they had expected a much larger increase today. You saw the markets build on this price and keeping the rand trading at a much weaker level. Whilst the market digested that we might see a much smaller cut, you saw an immediate dash for currency and there was demand for the rand, dipping below that R18 to a dollar level. So all in all, we are seeing a stronger currency because the interest rate didn’t drop as much as the markets expected.”
Markets’ reactions to the repo rate cut with Lavan Gopaul:
Economist Miyelani Mkhabela says that he expected the bank to cut the repo rate by 100 basis points.
“The 50 basis points is a measure that can be good for consumers, but you will have expected them to cut the repo rate by 100 basis points. That would have created more ease for the consumers, whether it would be businesses or individuals because the economy is deeply affected. When at the same time you look at inflation, you can realise that it is at 4.1% and looking at the target of 3.5%, it really needs again 100 basis points.”
He says that consumers will feel the 50 basis points difference in the repayment of loans and bonds.
“Consumers will start to see on their bonds or their loans and vehicle finances … they will see a difference in their repayment models and at the same time, we will look at a better relief in terms of income. So, if you were paying a higher bond, you will start to have some figures that will be part of your possible income.”
Economist Miyelani Mkhabela discusses the Reserve Bank’s decision:
The central bank says COVID-19 has presented challenges in forecasting domestic economic activity. It however says job losses are expected to be widespread, as even with eased lockdown regulations, trade and investments will be hugely impacted.
Economist at Nedbank Isaac Matshego explains:
Consumers with debt will see a reduction in the amount of money they pay on their debt.
