Relief as repo rate cut, but fears over SA’s economy remain
The South African Reserve Bank slashed the repo rate by one full percentage point to 4.25% — the latest financial intervention to alleviate pressure on consumers and keep the economy going.
The cut — the second in less than a month — brings the interest rate to the lowest point in history as global financial players pare back lending rates to offset the damage caused by the Covid-19 pandemic.
But experts said the bank’s forecast that the GDP would contract by 6.1% — effectively shaving as much as R400bn from the fiscus — was a gracious and conservative estimate.
“We are in for something really bad here. That is too conservative — the economy will contract by more than that. The last time we saw something like this was in 1929,” said economist Dawie Roodt.
SARB governor Lesetja Kganyago said in a statement that the shift in monetary policy was aimed at improving the resilience of households and business as forced closures — part of the national lockdown expected to last at least 35 days — begin to pinch.
Consumers will pay less interest on their debt, allowing for more disposable income and some welcome respite.
“In addition to continued easing of interest rates, the Bank has taken steps to ensure adequate liquidity in money and government bond markets and to ease capital requirements to free capital for on lending by financial institutions. Each of these steps make more capital available to households and firms,” said Kganyago on Tuesday.
The move came on the back of an instructive talk shop on Monday night with health advisory council chair Prof Salim Abdool Karim, who set out what needs to be done to ease the lockdown.
Stringent measures, including a mass screening campaign and hi-tech mobile tracing of contacts, had help flatten the curve, said Abdool Karim.
But he warned that an abrupt end to the lockdown would have SA run the risk of unravelling their efforts — a harbinger that the lockdown and its devastating effect on business and local economy would not abate soon.
Kganyago said in line with the global downturn, the Bank forecast that the South African GDP would contract by 6.1% in 2020, effectively peeling R400bn away from the fiscus.
“It is a massive drop — and with the depreciation of the rand against the dollar, it might well be more than that,” economist Azar Jammine told TimesLIVE.
It was this startling figure that prompted the Bank to slash the interest rate.
“If people have applied for payment holidays from the banks already, the rate cut won’t make much of a difference now — but its easing would be felt when things return to normal,” he said.
The way in which the banks are offering that holiday, Jammine said, was through delaying the repayment date of loans but compounding the interest.
“Once things return to normal and people end up having to repay the interest, at least it may be lower,” he said.
Roodt said the cut was not unexpected but the timing was cause for concern.
You cut the interest rate to try and inspire people to borrow money but tell me, who is going to buy a car in this climate?Dawie Roodt
“The haste with which they have done it ... You run a risk when you change monetary policy and things can go wrong. This is the right decision, but the currency could suddenly lose a lot of value and you also create the impression of panic,” he said.
“The benefits to the economy are not significant. You’ll spare the consumer here and there, but the economy is going to be crushed. You cut the interest rate to try and inspire people to borrow money but tell me, who is going to buy a car in this climate?”
While the lockdown has many relegated to their homes, the Sunday Times reported that the state was formulating an emergency plan to kick-start SA's economy after the lockdown, all in a bid to stave off a jobs bloodbath that could take unemployment to more than 50%.
This week the national command council was to hear proposals from some industries to ease certain restrictions during the lockdown.
Among them are lobbies from the tobacco and alcohol sectors, as well as a call to allow fast-food outlets to reopen.
In the public interest, none of our corona virus news coverage will be placed behind our paywall and will be available free for all to read. If you would like to support our mission of delivering award-winning, independent local news, please consider taking out a subscription by clicking here.
Would you like to comment on this article or view other readers' comments? Register (it’s quick and free) or sign in now.
Please read our Comment Policy before commenting.