Everything we know about the repo rate decision

Although the South African Reserve Bank held interest rates steady this week, its announcement – like the one on Wednesday in the US – indicated that this could change depending on future data prints.

In his address after the Monetary Policy Committee’s (MPC’s) two days of deliberation, South African Reserve Bank Governor, Lesetja Kganyago, said the MPC decided to keep the policy rate unchanged, at 7.5%. Four members preferred this action, while two favoured a cut of 25 basis points.

This results in the repo rate remaining at 7.5%, while the prime lending rate stays at 11%. The news comes on the back of three successive 0.25 percentage point cuts.

A Bloomberg survey of economists showed that most expected the repo rate to remain unchanged at 7.5%, with anticipations of a four-to-two ratio against a cut.

Dr Azar Jammine, director and chief economist at Econometrix, said the pause in the cutting cycle is no surprise. “My interpretation was, especially after listening to Federal Reserve Chairman Jerome Powell last night, he had a similar debate. He set the marker for Kganyago.”

In the US, the Federal Reserve left rates unchanged this week for the second time in a row due to economic uncertainty and higher inflation. Jammine told IOL that the US central bank may relook its view if the economic position changes and was in no rush based on current information. “I think it’s the same thing here in South Africa.”

Kganyago, who is in his third term in the position, said on Thursday that there are both upside and downside risks to the inflation target, which includes proposed VAT increases, lower-than-expected electricity price hikes, as well as better fuel-price projections in an environment in which inflation appears to be contained “for now”.

Jammine pointed out that retail spending had increased and cutting interest rates was less useful than growing the economy and creating jobs. “With retail sales up 9%, consumers are obviously finding spending money from somewhere. The Two-Pot retirement scheme is part of the equation and boosting consumer spending. If it weren’t for that, the economy would be really down and out.”

The central bank expects GDP growth of 1.7% this year.

Berry Everitt, CEO of the Chas Everitt International property group, said from a real estate point of view, this situation is likely to lower consumer and investor confidence and put a damper on home sales overall, but will also most likely increase the demand for rental properties – and the scope for rental increases if salaries continue to increase at above-inflation levels. 

Old Mutual chief economist, Johann Els, told IOL that the decision was a “missed opportunity”. Commenting on current geopolitical issues as well as US President Donald Trump’s trade policies, he said: “It seems clear that, despite denials to the contrary, the global risk factors outweighed the local issues.”

Els noted that “all the evidence suggests that rates should have been cut. There was a window of opportunity. They chose not to take it and chose to focus on global risk issues”. He added that the rand had not reacted adversely to global issues.

Ahead of the announcement, he said that, given various factors including a lower-than-expected electricity tariff increase, the MPC had space to cut rates, although this was unlikely, and the vote was likely to be a split among members.

Investec chief economist, Annabel Bishop, said in a note ahead of the announcement was the central bank was expected to leave rates unchanged as “it remains concerned over the high degree of uncertainty around the global outlook and still sees risks to domestic inflation to the upside”.

Els said: “There is a real possibility of further rate cuts down the line, particularly if we see a more pronounced weakening in the US economy that results in a stronger, more stable rand”.

Econometrix anticipates a 25bps cut in May, with Jammine not discounting the possibility of additional cuts in the year ahead.

IOL BUSINESS