The SA Reserve Bank’s monetary policy committee cut the repo rate by 100 basis points, or one percentage point, from 6.25% to 5.25% on Thursday. The repo rate is the rate at which the central bank lends money to commercial banks.
The Reserve Bank is reportedly under pressure to help stop the economy’s downward spiral. South Africa is already in recession, and the fall-out from business disruption, due to the coronavirus crisis, will be significant.
According to reports a rate cut could hurt the rand – lower interest dents its investment appeal – but SARB Governor, Lesetja Kganyago, said the steep interest rate cuts in other economies have created space for the bank to address the rapidly deteriorating state of the South African economy.
On Sunday, the US central bank cut its rates to close to 0%. Other banks have followed. The Reserve Bank was also helped in its decision by a collapse in oil prices.
While consumer inflation reached the highest level in 15 months (4.6%) in February, Brent crude oil is now trading around $27 a barrel, from above $56 in February.
At this stage, it looks like petrol prices will come down by at least R1 per litre in the first week of April, which should ease inflationary pressure on the local economy.
A Drop or Increase in the Repo Rate
According to the national debt advisors, a rise or drop in the repo rate can significantly influence inflation and consumer buying power.
A decrease in the repo rate means the commercial banks can borrow more money from SARB at a cheaper rate, meaning lending rates for consumers also decrease.
On the other hand, if interest rates increase, consumers will have less money to spend, causing the economy to slow down and inflation to decrease.
