What will the effect on the prime rate be when the repo rate is cut

Sarb cuts the repo rate

Rate has now been cut by 300 basis points in 2020 to mitigate economic impact of Covid-19 pandemic.

South African Reserve Bank (Sarb) governor, Lesetja Kganyago. Image: Moneyweb

South African Reserve Bank (Sarb) governor, Lesetja Kganyago, announced another 25-basis points repo rate cut on Thursday, taking the rate to a four-decade record low of 3.5% and the prime commercial lending rate to 7%.

The widely expected decision was made following the bank’s 3-day Monetary Policy Committee (MPC) meeting in Pretoria.

Read: Covid-19 to push SA savings to record low

The latest cut means that the repo rate has been slashed by 300 basis points or 3 percentage points this year, as the bank takes unprecedented monetary policy steps to help mitigate the economic fallout of the Covid-19 pandemic.

The Monetary Policy Committee has cut the repurchase rate by 25 basis points, bringing it to 3.50% per annum, with effect from 24 July 2020. #SARBMPCJUL20 pic.twitter.com/qW0tEvkm93

— SA Reserve Bank (@SAReserveBank) July 23, 2020

In April, amid the initial Covid-19 “hard lockdown” to curb the pandemic, Sarb called an emergency MPC meeting and slashed the repo rate by 100 basis points. At its last meeting in May, it cut the rate by a further 50 basis points.

“The Covid-19 outbreak has major health, social and economic impacts, presenting challenges in forecasting domestic and global economic activity. The compilation of accurate economic statistics will also remain severely challenged, ” Kganyago said in his MPC address.

“Our second quarter estimate for output has been revised lower. The Bank currently expects GDP in 2020 to contract by 7.3%, compared to the 7.0% contraction forecast in May, ” he said.

“Even as the lockdown is relaxed in coming months, for the year as a whole, investment, exports and imports are expected to decline sharply. Job losses are also expected to rise further, ” added Kganyago.

The governor noted that the easing of the lockdown “has supported growth in recent weeks” with activity indicators showing a pickup in spending from extremely low levels.

“However, getting back to pre-pandemic activity levels will take time. GDP is expected to grow by 3.7% in 2021 and by 2.8% in 2022, ” he said.

In addition to continued easing of interest rates, the SARB has relaxed regulatory requirements on banks and has taken important steps to ensure adequate liquidity in domestic markets. #SARBMPCJUL20 pic.twitter.com/JHZBAvqKma

— SA Reserve Bank (@SAReserveBank) July 23, 2020

Three members of Sarb’s MPC preferred a cut of 25 basis points and two preferred to keep rates on hold at the latest meeting, according to Kganyago.

This is an indication that the bank will be more cautious on further rate cut decisions going forward.

“The implied path of policy rates over the forecast period generated by the [Sarb] Quarterly Projection Model indicates one repo rate cut of 25 basis points in the fourth quarter of 2020 [and] remaining unchanged in the first quarter of 2021, ” said Kganyago.

Read: African central banks face end to cutting cycle at July meetings

“Monetary policy can ease financial conditions and improve the resilience of households and firms to the economic implications of Covid-19. In addition to continued easing of interest rates, the Sarb has relaxed regulatory requirements on banks and has taken important steps to ensure adequate liquidity in domestic markets. These actions are intended to free up more capital for lending by financial institutions to households and firms, ” he added.

Kganyago reiterated that monetary policy on its own cannot improve South Africa’s potential growth rate or reduce fiscal risks.

“These should be addressed by implementing prudent macroeconomic policies and structural reforms that lower costs generally, and increase investment opportunities, potential growth and job creation. Such steps will enhance the effectiveness of monetary policy and its transmission to the broader economy, ” he noted.

According to Moneyweb calculations, the latest 25 basis points rate cut will see homeowners with a R1 million existing 20-year home loan, reduce their bond payment by around R150 a month. This is based on a prime lending rate.

South Africa’s repo rate cuts totalling 300 basis points since the beginning of this year, effectively mean that such homeowners will now be saving around R1900 a month in bond payments.