The latest interest rate cut by the South African Reserve Bank (SARB) will give South African homeowners, consumers and businesses important additional financial support during these harsh times for the economy and the country.
The one percent interest rate cut by the SARB today – the second in less than a month – is the monetary policy transmission mechanism that allows banks to further lower the cost of credit for their customers. This will give consumers more money to save, reduce debt or spend on essential goods and services – all of which is good for the economy. Unfortunately for depositors and savers, it also means lower deposit rates.
The SARB sets the benchmark repo rate, the rate at which it lends to commercial banks. The repo is now at its lowest level since it was introduced in 1998. Commercial banks borrow less than two percent of their total funding requirements from the SARB at the repo rate, with the balance being secured from depositors. The repo rate informs the prime reference rate, which banks use as a benchmark to determine some client interest rates. Client rates can be above or below prime, after considering their credit risk profiles and general market conditions. Lending rates can also be linked to the Johannesburg Interbank Agreed Rate (JIBAR) or can be fixed at rates that are related to the duration and credit risk of the loan, among other considerations.
Repayments on home loans and other asset finance, and for personal credit, that are linked to prime, will be reduced for customers by one percent as soon as the rate cut takes effect. Banks have already announced a number of other initiatives to reduce the financial stress for customers in good standing who find themselves in difficulties because of the Covid-19 pandemic and the national lockdown. Customers who continue to experience financial difficulties, should contact their bank.
The SARB estimates that the economy will shrink by 6.1% this year and that consumer price inflation will remain below the 4.5% midpoint of the inflation target in 2020, and close to the midpoint in 2021. Government needs to use this time to heed the SARB’s warning that: “Monetary policy however cannot on its own improve the potential growth rate of the economy 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 further reduce existing constraints on monetary policy and its transmission to lending.”