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Economists say SA Reserve Bank rate cut likely

Jul 16 2019 05:00
Khulekani Magubane

Economists are expecting the SA Reserve Bank’s Monetary Policy Committee to this week announce a reduced repo rate for the first time since March 2018. 

The central bank's recently reappointed governor Lesetja Kganyago is set to announce the repo rate on Thursday in Pretoria at 15:00.

The repo rate is the benchmark interest rate at which the Reserve Bank lends money to other banks. Changes in the repo rate affect the prime lending rate, which is the lowest rate at which banks start lending to clients.

Econometrix chief economist Azar Jammine said in a note there was speculation the Reserve Bank would cut the benchmark rate. 

"Much of the expectation surrounding a rate cut is based on the view that the economy is extremely weak and the inflation rate has declined to the midpoint of the inflation target, creating a favourable environment for contemplating a rate cut," said Jammine.

Jammine said while it may appear that the strengthening of the rand by around 3% through June boosted the likelihood of a rate cut, this was a short-term phenomenon and unlikely to play any major role in the decision.

"The Reserve Bank's decision might be seen by some as representing a reversal of a decision to increase the repo rate made in November last year, which [...] was largely criticised in the marketplace," Jammine added.

Investec chief economist Annabel Bishop said in a note to clients that she expects a 25 basis point (or 0.25%) cut to rates on Thursday.  In May, the Reserve Bank's decided to keep the repo rate unchanged at 6.75%, a decision in line with the expectations of analysts. A 25 basis point cut would take the new rate to 6.5%. 

Efficient Group economist Francois Stofberg said if the central bank doesn't cut rates on Thursday, it may well chose to reduce rates at the MPC's next meeting in mid-September. 

"We believe that the MPC will decrease the rate by 0.25%, or they will wait for now, and decrease the interest rate by 0.25% later. Our real interest rate compared to our peers globally is about 1.5% higher," said Stofberg.

"In light of SA interest rate decisions in the context of international monetary policy, the international community is looser. There is a clear shift in international monetary policy. We won’t see the rand depreciate again because the global community is decreasing rates," he added.

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