Reserve Bank Governor Lesetja Kganyago on Thursday announced an interest rate cut of 100 basis points, to 5.25% per annum, as South Africa moves to combat the severe economic effects of the coronavirus.

The cut follows a three-day meeting of the Monetary Policy Committee (MPC).

This pushes down the prime lending rate by banks to 8.75%.

Kganyago says the impact of the coronavirus could be softened by lower oil prices. He says inflation is expected to be muted. However, he says South Africa’s economy is expected to contract by 0.2% in 2020.

The Reserve Bank Governor argues that lower inflation and suppressed economic growth has necessitated rate-cutting. He says the central bank has room to move.

In the video below, Kganyango says MPC will continue monitoring risks to  interest rates:

Economists say because of the lack of demand in the economy, the interest rate cut may not be enough to boost economic activity.

Seliane Financial Services’s Likhapha Seliane says “The cut of the interest rates does not stimulate demand.”

But what does this actually mean?