Relief as Reserve Bank slashes the repo rate
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The South African Reserve Bank (SARB) announced that it had slashed the repo rate by another 100 basis points for the second time in as many months.
The decision is aimed at mitigating the negative impact on the economy of the lockdown to curb the spread of Covid-19. The lockdown was initially set to last 21 days but has been extended by two weeks to the end of April.
Economists have described the decision as a “windfall” for consumers holding loans with banks, which will translate into savings of thousands of rand, depending on the size of their debt. However, a Pietermaritzburg-based NGO representing poor communities warned that such “rescue packages” should not be the preserve of the middle class.
Announcing the decision, SARB governor Lesetja Kganyago, said the bank was acting in line with what other central banks around the world had done in times of national challenges.
Dr Christie Viljoen, PwC economist, described the decision as good news for consumers, adding that the central bank had to make the cut partly due to the country’s very poor economic outlook.
“This drop is very significant, it’s something that we have never seen,” said Viljoen, adding that the announcement was unexpected.
With every 25 basis points cut, said Viljoen, the consumer makes a saving of R165.
He previously told The Mercury that a consumer paying a bond of R1million could expect to pay about R165 less for every 25 basis point cut in interest rates on their monthly repayments (R660).
He said the repo rate cut, combined with the previous cut, could see a consumer saving around R1320 a month.
“The idea of the reserve bank is that people could have more money and they could spend it and stimulate the economy,” he said.
However, Viljoen cautioned that having more money did not mean consumers would spend it.
“With the current uncertainty, especially in the job environment, people might just decide to hold onto that money to see how things turn out.”
Viljoen said the latest consumer index showed that consumers were reluctant to spend even on durable items like furniture.
He said those who spend the money should use it to pay off their debt much sooner.
Another economist, Mike Schussler, said the repo rate cut was a brilliant idea, but would only be effective if it was able to get the economy going again.
He said between the interest rate cuts and the drop in petrol price, consumers would have extra cash they could spend elsewhere.
He added that although people who had funds invested might be affected, the country needed to implement this measure.
“We still have ammunition in (interest rates). If this drop doesn’t work, we can drop them (interest rates) again in a few months. We can’t do much fiscally, but we can use the interest rate to stimulate the economy,” he said.
The SA National Consumer union vice-chairperson, Dr Clif Johnston, said this was good news for people who had debt, as they would see a substantial drop in their repayments.
“I’m not an economist but the markets are in a bad way, and this could help,” he said.
However, the move could spell trouble for people who are living on their investments, as they will see their income drop.
Mervyn Abrahams, programme co-ordinator at the Economic Justice and Dignity Group, said they welcomed the announcement as it would assist the middle class by easing their debt pressures, and lead to disposable income being available that could be spent to stimulate the economy.
He said generally, South African interest rates were very high compared to global standards and, therefore, the SARB had room to cut.
“We would like to point out that this will benefit the small minority who are using the banking system - the poor will not benefit.
“That’s why we’re supporting the call that for the next six months the government increases the child support grant by R500 to balance out the benefits that have been received by the middle class.”
Abrahams said poor communities deserved a break because they would not benefit from the repo rate cut, as there was no direct correlation between it and food prices.
In a statement, Kganyago said the national lockdown had left businesses shut down for longer periods, and households with income spending less.
He said current conditions would likely also increase job losses. The impact would be particularly severe for small businesses, and individuals with earnings in the informal sector.