22 May 2020 – The South African Reserve Bank (Sarb) has effectively slashed its repo rate by just over 42% within the first five months of this year, largely in response to the Covid-19 economic turmoil.
That’s the word from independent economist Mike Schüssler, following the bank announcing a 50 basis point (bp) repo rate reduction on Thursday. The latest cut takes the rate to an almost 47-year low of 3.75% and the prime lending rate of commercial banks to 7.25%.
At the start of the year the repo rate stood at 6.5%, and since then there has been a cumulative 275bp slashing of the rate.
“This represents the biggest reduction in repo rates within such a short period, just five months. There have been bigger cumulative rate cuts within a calendar year, but these cuts in total represent something of a record,” says Schüssler.
“It is very rare to get interest rates this low. Rates are as low as November 1973, but also in close range to the record low of the mid-60s. It is also in line with rates of the 1930s, the time of the world’s Great Depression,” he notes, adding that it coincidently “reflects the risks” the South African economy is currently facing.
Schüssler says the economy is in deep trouble, and while the Reserve Bank’s rate cuts are welcome, it will take time to filter through the economy.
“The cuts are very positive. It will have an impact, but [it will take] time, and also on the proviso that the economy is opened up again [post lockdown]. The interest rate cuts will provide some relief, but the real impact will be when things are opened up,” he stresses.
“Right now, the fear factor around Covid-19 and the economic impact, will see most people conserving cash or wanting to pay off home loans. Increased demand and activity in the housing market [from the rate cuts] may only really be months away. The same is likely for the car market,” he adds.
“People are not going to rush back to buy homes and cars, as well as other big-ticket items. They are worried at the moment, so the relief provided by the rate cuts will go towards paying off debt and perhaps saving in fear of losing their jobs.”
According to the MegaTrends Property Hotline, the latest 50bp rate cut will see homeowners with an existing R1 million, 20-year mortgage loan, reducing their bond payment by around R306 a month.
Notably, it also points out that such homeowners will now effectively be paying around R1 747 per month less on their bonds, due to the cumulative 275bp repo rate cuts since the beginning of the year.
“The rate cuts will also mean lower repayments on all other forms of credit, including car finance, personal loans and credit-card balances, which will bring further relief to many households currently in financial distress due to the Covid-19 lockdown,” adds MegaTrends.
FNB economist, Siphamandla Mkhwanazi, agrees with Schüssler’s sentiments that many South Africans may use the financial relief from lower interest rates to pay off debt as opposed to disposable spending.
“The significant overall repo rate cuts this year will assist people with home mortgages and car loans to pay off their debt. South Africans, especially in the middle to upper income levels, are likely to focus more on saving or paying off debt,” he says.
“They have a worried outlook. So, the large rate cuts may not have the stimulus effect that the Sarb may be envisioning. Due to high levels of uncertainty around Covid-19, many South Africans may choose not to spend as they would normally do,” adds Mkhwanazi.
Meanwhile, Schüssler says even on the retail front, increased spending is most likely to come towards the end of the year. He foresees a uptick around Black Friday and the festive season, when “hopefully the economy is fully operational”. Source (Moneyweb)