PRETORIA – Reserve Bank governor, Lesetja Kganyago, has announced that the Monetary Policy Committee will cut the country’s national interest rates.
The SARB unexpectedly cut repo rate by 25 basis points to 6.75 percent on Thursday saying a near-term improvement in growth was unlikely but that the inflation outlook had improved.
“Given the improved inflation outlook and the deteriorated growth outlook, the MPC has decided to reduce the repurchase rate by 25 basis points with effect from 21 July 2017, to 6.75 percent per annum,” Governor Lesetja Kganyago told a media conference.
The decision to cut the current rate by 25 basis points comes as a surprise, with many analysts speculating that the bank would leave the rates unchanged for the 15th month in a row.
However, traders were pricing in a 25 basis-point rate cut by the end of the year, according to forward-rate agreements used to speculate on borrowing costs.
The cut is also expected to bring some much-needed relief to consumers with inflation easing as food-price growth slows amid the country’s recovery from the worst drought in more than a century.
What is the South African Reserve Bank repo rate?
The repo rate is the interest rate at which the South African Reserve Bank (SARB) lends money to commercial banks. It uses this rate as a tool for regulating the amount of money in the South African economy. Changes to the rate influence a number of factors such as consumers buying power, national debt levels, business growth and inflation.
What effect will lowering the repo rate have?
The decrease in the repo rate will result in the commercial banks of South Africa borrowing money from the SARB at a cheaper rate, therefore enabling businesses and consumers to borrow money from the commercial banks at a reduced lending rate.
The rate that the banks lend to the public at is referred to as the prime lending rate. A reduction in the prime lending rate allows business and consumers the opportunity to borrow more. This will inject more cash into our economy, which in turn increases the economy’s Gross Domestic Profit (GDP). From a business perspective, businesses will have more funds at their disposal to hopefully employ more staff, therefore, encouraging job creation and business expansion.
Individuals who have existing bonds or loans that are not at fixed rates will be charged a lower interest rate and will be able to either reduce their bond repayments or continue to pay the same repayment and by doing so reduce their debt faster!!
One negative impact the reduction in the repo rate, and the consequential increase in the supply of money will have is that it will make the Rand more vulnerable to inflationary pressures.
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