Repo rate cut welcomed but ‘more is needed’ to stimulate economy

The South African Reserve Bank’s move to cut its benchmark interest rate for the first time since July has been welcomed, but economists believe more needs to be done as inflation is forecast to remain within the target and the economy is barely growing.

The monetary policy committee unanimously voted to lower the repo rate to 6.25% from 6.5%, Governor Lesetja Kganyago told reporters on Thursday in Pretoria.

The prime rate will also fall to 9.75%.

“The decision today to reduce interest rates by 25 basis points will help to underpin business and consumer confidence,” said North West University Business School economist Professor Raymond Parsons.

“It is a welcome recognition of the need to reduce borrowing costs for business and consumers in SA. Although it is a small step in the bigger scheme of things in the SA economy, it can help to underpin business and consumer confidence at the present juncture,” he said.

“In view of existing pressures on the economy the psychological impact of a modest interest rate cut will currently be greater than its real economic effect. But it is nonetheless positive.”

‘Reserve Bank must take decisive action’

Samuel Seeff, chairperson of the Seeff Property Group believes the Reserve Bank’s stance has been too conservative over the last year at the expense of the economy and property market.

“It missed at least two, possibly three, opportunities to cut the rate given that inflation has remained well within the target range for most of last year while the currency remained reasonably stable, and in fact improved,” he said.

“South Africa’s interest rate is higher relative to the rest of the world and out of step with the economy which is struggling while consumer and investor confidence is at record-low levels. We have been in a holding pattern for about eighteen months and it is time for decisive action from the Reserve Bank to take responsibility and provide support for the economy.”

Seeff believes an additional 50-100 basis points cut from the interest rate during the first half of 2020 would restore confidence and provide vital impetus for the economy

“Consumers are under enormous pressure and a rate cut will put some money back into household budgets and boost important economic sectors including retail and housing,” he said.

The property market has continued ticking over, carried largely by the low to mid-market residential sector, but it remains lacklustre.

“The overall sense is that sales volumes remain muted as a lack of confidence continues to hold buyers back.”

The challenge of a slow market is that buyers are struggling to sell their homes in many areas which affects their ability to buy and move up, said Seeff.

Kganyago added that electricity supply constraints would keep economic activity muted, while business confidence remained weak.

The central bank also re-evaluated South Africa’s GDP estimating that for 2019 it will only expand by 0.4% while the outlook for 2020 and 2021 were downgraded to 1.2% (from 1.4%) and 1.6% (from 1.7%) respectively.

Kganyago also said the “implementation of prudent macroeconomic policies and structural reforms that lower costs and increase investment, potential growth and job creation, remain urgent.”

Parsons said that cuts in interest rates may be needed later, especially as the MPC’s growth forecasts may in any case be on the optimistic side.

He said the World Bank and other economists were already expecting a growth rate of below 1% in 2020, compared with the MPC’s latest growth forecast of 1.2%.

“The MPC’s decision on interest rates nonetheless does not gainsay the fact that ultimately the main burden of turning the economy around and securing job-rich growth does not lie with monetary policy, but rather with the urgent expediting and implementing of the pro-growth reform policies to which SA is committed,” said Parsons.

“The state of the nation address and the budget next month hold the policy keys to a pivotal year for the SA economy,” he said.

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