Category Economy
SUB CATEGORIES General |  Budget 2017 |  Budget 2018 |  Budget 2019 |  Budget 2020 | 

The Reserve Bank eases monetary policy again to support growth

23 July 2020 Novare Holdings

SA Reserve Bank Governor, Lesetja Kganyago, announced this afternoon that the monetary policy committee (MPC) had decided to maintain its accommodative stance by lowering the repo rate by an additional 25 basis points (bps) to a record low of 3.50%.

Said Olaotse Leepile, CEO of diversified African financial services group, Novare Holdings: “The cut was in line with consensus forecasts, and adds to cumulative cuts of 275bps already implemented this year. The Bank had been under immense pressure from armchair commentators ahead of and during its three-day MPC meeting to use its ‘fire-power’ to help deal with the economic consequences of the Covid-19 crisis.”

The SA Reserve Bank said it expected gross domestic product (GDP) in 2020 to contract by 7.3%, compared to the 7.0% contraction forecast in May. While getting back to pre-pandemic activity levels will take time, the Bank expects GDP to grow by 3.7% in 2021 and by 2.8% in 2022.

Aside from the depressed economy, the decision to lower the repo rate was influenced by consumer inflation that fell to 2.1% in May 2020, the lowest since September 2004 - and well below the 3% to 6% target band the Reserve Bank uses to guide interest rate policy. The figure has been at or below the 4.5% midpoint of the range for 18 months.

The rate cut opens the way for commercial banks to reduce their interest rates, helping lift economic activity by lowering borrowing costs to consumers and businesses.

Looking ahead, Leepile commented: “The biggest contributor to the decline in inflation in May was the fall in fuel prices. While subdued economic demand is likely to continue placing downward pressure on the consumer price index in the short-term, this may not herald further interest rate cuts later this year.

“There’s a chance that inflation could pick up over the months ahead as the price of oil has increased substantially since bottoming in April. This, combined with the fact that rates have already been aggressively cut, means that there may not be additional rate cut relief later this year, unless GDP growth expectations are adjusted downwards again.”

Leepile noted that, while further rate cuts would be welcomed by business and cash-strapped consumers whose debt would cost less, pensioners dependent on interest earned from savings would welcome a reprieve in the rate cutting cycle. Cuts announced so far this year have erased about one-third of their interest earnings.

The inverse relationship between interest rates and bond prices means that when interest rates fall, bond prices rise, and vice-versa. Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall as stronger investor demand drives up the price of the bond.

“Another drop in interest rates is likely to also impact the price of bonds that tend to rise as investors buy bonds already on the market at coupon rates that are higher than those applicable to similar bonds issued after the rate reduction. Lower interest rates could also encourage investors to withdraw from money market instruments to increase their allocation to equities, which would push up stock prices,” Leepile said.

The forward rate agreement (FRA) market is currently not pricing in any further cuts for the year as the previous unanimous decision by the Monetary Policy Committee was more evenly split this time around, indicating possible caution by the Committee regarding further cuts.


Quick Polls


The intention with lockdown was to delay or flatten the Covid-19 infection curve and give both the private and public healthcare sectors time to prepare for the inevitable onslaught. Did the strategy work?


No, the true numbers are not reflected. Almost a quarter of South Africans may already have been infected with Covid-19
It’s too soon to tell. We will likely get a second wave with stringent lockdown regulations in place again
Yes, South Africa bought enough time to make a significant difference. We saved lives and have passed our peak. The worst is over
fanews magazine
FAnews August 2020 Get the latest issue of FAnews

This month's headlines

Ethical behaviour - are you toeing the line?
Latest business interruption developments raise more questions than answers
Brokers remember: You are accountable...
A sustainable pension - How to manage living annuities in uncertain times
Claim stats… life can change in a heartbeat
Are South Africa’s income protection benefit providers ready for COVID-19?
Subscribe now