Repo rate drops by 0.25%

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) has announced a 25 basic point (0.25%) decrease in the repo rate, bring it down to 6.75%. There were a number of contribution factors to this decision.

Reserve Bank governor Lesetja Kganyago noted that the domestic growth outlook remained a concern for the MPC following the contraction in GDP growth in the first quarter of the year. “With the exception of the primary sector, all sectors recorded negative growth. While positive growth is expected in the second quarter, the Bank’s annual growth forecasts have been revised down further. The forecast for 2017 has been adjusted down from 1.0% to 0.5%, and the forecast for 2018 is down from 1.5% to 1.2%. Growth of 1.5% is expected in 2019, compared with 1.7% previously,” stated Kganyago.

While SARB has lowered the repo rate, Kganyago cautioned that in the current uncertain environment, the Reserve Bank will not hesitate to reverse this decision at the next MPC meeting in three months’ time, should the inflation outlook and risks deteriorate.

Reactions to the announcement

Responses to the SARB’s decision have been overall positive. Dr Andrew Golding, chief executive of the Pam Golding Property group noted that this decision will be good news for home owners with mortgages.

“Consumers could use some positive news right now and this downward shift, albeit only a quarter of a percent, is important as it sends a positive signal to the market and hopefully heralds the start of a downward shift in the interest rate cycle. It will also impact favourably on market sentiment and therefore, activity in general,” said Golding.

He added: “With inflation seemingly under control and the rand looking stronger, and against a backdrop of a sluggish economy, what South Africa needs is a stimulus for economic growth and investment.”

Following the announcement, First National Bank (FNB) confirmed that its prime lending rate will drop to 10.25% effective from 21 July.

Jacques Celliers, FNB CEO, said: “Today’s decision to cut rates will contribute to addressing the levels of uncertainty we are seeing in business and consumer confidence. The present lack of consumer and business confidence are taking on alarming dimensions and duration not seen in decades. Comprehensively addressing confidence levels is, however, beyond the ambit of the MPC and requires a tangible and urgent rediscovery of common purpose amongst all South Africans.”

Sizwe Nxedlana, chief economist at FNB, further noted that the SARB’s decision highlights that the Reserve Bank is less concerned about long-term inflation than at previous meetings

“Lower than anticipated inflation outcomes and the absence of any adverse shocks, will mostly likely lead to further policy easing. However, relative to other easing cycles we expect this cycle to be shallow. Monetary policy tightening in the developed market is one of the factors that will limit the extent to which policy is eased locally,” said Nxedlana.

He concluded: “The 25 basis point cut is unlikely to have a material impact on economic growth, but will provide modest relief for embattled consumers.”