Repo rate cut to 3.75%, banks to cut lending rates to help ease burden on consumers

South Africa's central bank on Thursday cut interest rates by 50 basis points taking its key repo rate down to 3.75% in the latest move aimed at mitigating the negative impact on the economy of a lockdown to curb the spread of Covid-19

The South African Reserve Bank's (SARB) monetary policy committee (MPC) traditionally holds its meetings once every two months and the next one was scheduled for 23 July.

"The MPC decided to cut the repo rate by 50 basis points, taking it to 3.75% per annum, with effect from 22 May 2020. Three members preferred a cut of 50 basis points and two preferred a cut of 25 basis points," SARB governor Lesetja Kganyago said in a statement.

Thursday's cut means that commercial banks will, in turn, cut their lending rates to consumers by half a percentage point to 7.25%.

Kganyago said that economic contractions were expected to be deepest in the second quarter of 2020, with gradual recoveries in the third and fourth quarters.

He said that in light of Covid-19, uncertainty about future global economic prospects, trade relationships and supply chains had again increased, adding that policy responses to the pandemic had generally been robust.

He said the implied path of policy rates over the forecast period generated by the Quarterly Projection Model (QPM) indicated two repo rate cuts of 25 basis points in the next two quarters of 2020.

"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 Bank has eased regulatory requirements on banks and has taken important steps to ensure adequate liquidity in domestic markets. These actions are intended to free up more capital for lending by financial institutions to households and firms," he said.

"Monetary policy however 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. Such steps will further reduce existing constraints on monetary policy and its transmission to the broader economy."

"Highly uncertain environment"

Kganyago said that global economic and financial conditions were expected to remain volatile for the foreseeable future and in the "highly uncertain environment" all future decisions would continue to be "data dependent and sensitive to the balance of risks to the outlook".

"The Covid-19 outbreak has major health, social and economic impacts, presenting challenges in forecasting domestic economic activity. The compilation of accurate economic statistics will also remain severely challenged. The Bank currently expects GDP in 2020 to contract by 7.0%, compared to the 6.1% contraction forecast in April. Even as the lockdown is relaxed in coming months, for the year as a whole, investment, exports and imports are expected to decline sharply," Kganyago said.

"Job losses are also expected to be widespread. Easing of the lockdown will support growth in the near term and some 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 3.8% in 2021 and by 2.9% in 2022. South Africa's terms of trade remain robust. Commodity export prices have eased in recent weeks, but are still at healthy levels. Oil prices remain generally low."