SA cuts rates again, by modest 25 bps

By
Font size: Decrease font Enlarge font
Reserve Bank governor Lesetja Kganyago warned that monetary policy alone cannot spur economic growth, and that wide economic reforms are needed. Reserve Bank governor Lesetja Kganyago warned that monetary policy alone cannot spur economic growth, and that wide economic reforms are needed.

The South African Reserve Bank (SARB) announced an additional rate cut on Thursday, of 25 basis points.

This takes the total cut in 2020 to 300 points, lowering the repo rate to 3.5% and the prime lending rate to 10%.

Reserve Bank governor Lesetja Kganyago announced that the Monetary Policy Committee was divided on the decision.

The latest cut reduces prime and the base home loan rate to a further historic low of 7.0%.

The cut is in line with expectations from economists, though many believed there was room for a deeper cut.

However, in his announcement, Governor Kganyago warned that monetary policy alone cannot spur economic growth, and that wide economic reforms are needed.

“Monetary policy cannot on its own improve the potential growth rate of the economy or reduce fiscal risks. These should be addressed by implementing prudent macroeconomic policies and structural reforms that lower costs generally, and increase investment opportunities, potential growth and job creation,” he said.

Monetary policy can ease financial conditions and improve the resilience of households and firms to the economic implications of Covid-19. In addition to continued easing of interest rates, the SARB has relaxed regulatory requirements on banks and has taken important steps to ensure adequate liquidity in domestic markets.

The Reserve Bank has revised its GDP growth outlook to -7.3% for 2020, worse than the 7% projection in May and worse than Treasury's forecast of 7.2%.

"Easing of the lockdown has supported growth in recent weeks and high frequency activity indicators show a pickup in spending from extremely low levels.

"However, getting back to pre-pandemic activity levels will take time. GDP is expected to grow by 3.7% in 2021 and by 2.8% in 2022," Kganyago said.

The bank still expects inflation to average at 3.4% for 2020. "The overall risks to the inflation outlook at this time appear to be balanced," he said.

Risks to inflation from currency depreciation are expected to be muted, he added.

But administrative prices such as electricity remain a concern for inflation.

"Upside risks to inflation could also emerge from heightened fiscal risks and sharp reductions in the supply of goods and services," said Kganyago.

Additional global Covid-19-related stimulus has seen the rand continue to maintain a solid footing, as the South African Reserve Bank (SARB) concluded its policy meeting on Thursday.


NEWSLETTER — GET THE LATEST NEWS IN YOUR INBOX. SIGN UP RIGHT HERE.


Enter your e-mail address below using Lowercase.