Lower repo rate is bad for markets for now, says Chris Harmse

The Monetary Policy Committee (MPC), during its press conference last Thursday on its latest repo rate decision, decided to lower the repo rate with 25 basis points from 7.00% to 6.75% with immediate effect. In return banks lowered their prime rate by 0.25% to 10.25%. This is the second cut for 2025, bringing the repo rate down by 50 basis points in total. 

Before the press conference there was a 50/50 division between economists and analysts on the possibility of a lower repo rate. The President of the Reserve Bank on Thursday,  Lesetja Kganyago said that inflation expectations, point towards moving towards the 3% objective. The average inflation rate for the year to date is 3.15%, this is despite the increase in October to 3.6% from 3.4% in September, which was announced last Wednesday. The governor sums the decision to lower the rate as follows, “Core goods prices are benefitting from exchange rate strength. Food price inflation seems to have peaked, although we have a small upward revision to this forecast, mainly from beef prices. Services inflation is unchanged from the last meeting: the announced medical aid increases are lower than last year’s."

Financial markets reacted negatively. In reaction to the lowering of the repo rate, a sell off of precious metals, South African bonds, and a global flight from riskier assets, spurred by investor worries over lofty tech valuations and uncertainty over near-term US interest rate cuts led to South African equity prices, and the Rand to bleed on Friday.

The same flight from risky assets due to worrying sentiment, saw the prices of crypto currencies tumbling. Bitcoin lost $17 000 last week, trading around $80 000 at one stage on Friday. This is a 17.5% drop in one week.

On the JSE, the All Share index decreased sharply on Friday, ending on 109 641 points. This is 2 332 points or 2.1% down from the previous Friday. The Resource 10 index lost 2.9% over the week, whereas prices for precious metals ended the week flat. The gold price traded down by a mere $4 for the week and closed above the $4 080 level. The platinum price lost $25 to $1514, palladium traded lower by $26 and silver remain flat around $50.25.

On the foreign exchange market, the negative sentiment towards risky assets had its toll on the Rand exchange rate. Against the US dollar the Rand dropped by 30 cents last week to R17.39/$, lost 28 cents to R22.78/£ and depreciated 14 cents to R19.99/€.

Volatility marked global stocks last week. The selloff in tech stocks, especially the sky-high valuations in the technology sector AI shares gained pace on Thursday afternoon on Wall Street and European indexes followed them on Friday. Equity rose again on Friday as traders boosted bets on an interest rate cut by the Federal Reserve next month. The Dow ended the week 1.9% lower, the S&P500 lost 1.95%, while the heavy tech and AI weighted Nasdaq tumbled by 2.74%.

Prospects for this coming week

This coming week financial markets in South Africa awaits the release of the producer inflation rate (PPI) for October by Statistics South Africa on Thursday. Expectations are that the annual production price inflation rate increased by 2.4%. This is marginally higher than the annual increase of 2.3% in September. On global markets the US will release its retail sales figures for September on Tuesday and its retail sales also for September on Wednesday.

Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturerat Stadio Higher Education.

*** The views expressed here do not necessarily represent those of Independent Media or IOL.

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