As was expected, the Monetary Policy Committee (MPC) of the SARB reduced the repo rate by 0.25% from 6.75% to 6.50% on 17 July 2019.
“Most economic commentators predicted this decision, although the general feeling is that the reduction should have been at the end of 2018, and a 0.5% reduction at least,” says Prof Danie Meyer, director of the TRADE (Trade and Development) research entity of the Faculty of Economic and Management Sciences at the NWU.
He explains that it is possibly a case of ‘too little too late’. “The economy is in dire need of a boost due to the shocking gross domestic product (GDP) growth data for the first quarter of 2019, at (minus) – 3.2%, which brought back fears of a new recession. A reduction of 0.25% on a property bond of R 1 million results in only a R 166 reduction per month, which is not really ‘putting more money in the pocket of consumers’.”
The inflation rate is showing interesting trends. Since January 2019 the rate has steadily increased from 4.0% to 4.5% in May, trending upwards but still well within the SARB target band of 3 to 6%.
Prof Meyer says a critical result will be the June 2019 inflation rate which is due for release on 24 July. An upward trend will stop short-term reductions in the interest rates, while a decrease in the inflation rate will allow the South African Reserve Bank Monetary Policy Committee to again lower the repo rate.
“Importantly, it should be kept in mind that inflation in SA is mostly driven by cost factors such as the petrol price, medical costs, electricity prices, food prices and municipal accounts, and not consumer demand. Lower interest rates usually lead to inflationary pressure.”
He explains that further debates are needed on the impact of the reduction of the repo rate on various components of the economy. “Is the impact only positive or are there also negative impacts? The 0.25% reduction is so limited and nearly insignificant regarding economic impact. It is more important from a psychological perspective, giving hope for future reductions.”
Prof Meyer says consumers are currently under pressure and this reduction could lift the general negative outlook of consumers. Usually a reduction in the repo rate signals that the economy is slowing down and stimulation of the economy is required. This stimulation is via consumer spending with more money in the pocket of consumers to spend.
“Consumer spending contributes approximately 60% of total expenditure in the economy. Consumer spending will therefore probably slightly increase, leading to a positive contribution to the economy, but with possibly less savings and more credit applications.”
The property market could also benefit from reduced interest rates with more affordable loans, the property market has been stagnating over the past few years.
“The domestic investment market has experienced an investment ‘strike’ and investment levels have been low over the last number of years and theoretically, this interest rate reduction could stimulate investment if a policy certainty environment existed, leading to growth. But policy uncertainty levels are still relatively high.”
He says international investors will also compare SA’s lower interest rates with competitors in the global financial markets and weight up risk factors associated with the local economy. Lower interest rates could lead to an outflow of money from the country, leading to a deficit in the balance of payment and lower demand for the local currency.
This then could result in a depreciation of the Rand and the effect thereof is again negative for the economy with more expensive imports and rising petrol prices leading to inflationary pressure.
“On the near horizon is the possibility of risk rating down-grades, especially by Moody’s. The structural problems in the economy are not currently visibly addressed by means of policy changes and a down-grade could also have more negative impacts on the already struggling economy.”
Prof Meyer says two critical statistical releases are in the pipe-line and will give more clear direction on the way the economy is heading towards 2020. Firstly, the inflation rate for June will be released on 24 July; the result is critical for the next MPC repo rate meeting, and on 3 September, quarter 2 GDP data will be released.
“Expectations are that the growth will be low at below 1% following the -3.2% rate for the 1st quarter. The economy is currently facing serious structural problems and the SA economic ‘ship’ needs to be turned in a different direction as a matter of urgency .”
Prof Danie Meyer
