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BREAKING: SARB slashes interest rate as coronavirus outbreak hits country

Lesetja Kganyago has announced that the MPC has decided to slash the repo rate by 100 basis points.
Lesetja Kganyago has announced that the MPC has decided to slash the repo rate by 100 basis points.

The Monetary Policy Committee has slashed the repo rate by 100 basis points. This will give debt-laden consumers and companies a financial breathing space as the world economy faces uncertain times due to the deadly and highly infectious coronavirus epidemic.

However, this didn't impress a prominent economist, who described the rate cut decision as mute.

The South African Reserve Bank governor Lesetja Kganyago made the interest rate-cut announcement following an MPC meeting that started on Wednesday and ended on Thursday at the bank's headquarters in Pretoria.

"This takes the repo rate to 5.25% per annum, with effect from 20 March 2020. The decision was unanimous," said Kganyago.

The cutting of the repo rate, the rate in which the Reserve Bank lends to the commercial banks, has an impact on the prime lending rate, which is the rate, commercial banks lend to customers.

The cut will see the prime lending rate go down to 8.75% from 9.75 %.

"The technical recession of the latter half of 2019 contributed to a lower economic growth forecast. In addition, Covid-19 and existing constraints such as loadshedding, imply significant downside risk to the forecast.

"With persistently low inflation, and the coronavirus now hitting economic activity, monetary policy in major advanced economies and China will likely remain accommodative over the medium term.

"Easy global financing conditions have previously supported the value of the local currency, but financial volatility and a sharp rise in perceived risk has caused the rand to depreciate by 17.2% against the USD since January," said Kganyago.

Kganyago added that the domestic economic outlook remained fragile.

"At this point, Covid-19 is likely to result in weaker demand for exports and domestic goods and services, but its impact on the economy could be partly offset by lower oil prices.

"We also expect disruptions to supply chains and to normal business operations. The Bank now expects the economy to contract by 0.2% in 2020. GDP growth is expected to rise to 1.0% in 2021 and to 1.6% in 2022," he said.

Economist Duma Gqubule was, however, unhappy with the rate cut.

"We needed Kganyago to come out with a bazooka and mow down the rate by at least 200 basis points. You must remember that central banks from other countries started slashing the interest rate as early as July while the local bank started doing so in January.

"This means the Reserve Bank is behind the curve on interests cut and they are failing to understand the scale of the global economic crisis that is created by the coronavirus.

"The Reserve Bank is busy playing catch-up while many restaurants and taverns are going to close down and thousands of jobs are going to be affected," Gqubule said.

To make matters worse, the Reserve Bank failed to announce a stimulus package to assist small, medium and micro enterprises to survive the coronavirus outbreak.

"This means our country's will experience a growth rate that will be worse than the global crisis and the budget deficit will shoot through the roof," he said.

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