Repo rate cut in a bid to curb the effect of COVID-19

In a surprise move the South African Reserve Bank has decided to cut the repo rate with another 100 basis points - the second of 2020 - taking the rate to 4,25 percent per annum.

In his statement Lesetja Kganyago, Governor of the South African Reserve Bank said that since the meeting in March, the COVID-19 pandemic has spread globally and its impact is being felt through all economies with current estimates from the IMF show global growth will contract this year by about 2,9 percent.

Adding that the strength of the recovery into the fourth quarter and 2021 will depend on how quickly countries are able to open up for economic activity safely, requiring sustainable social distancing rules, safety processes put in place by businesses and public institutions, and capacity of hospitals to accommodate those in need.

This cut also means that prime lending is down to 7.75 percent. 

South Africa’s interest rates are now at their lowest in history and come amid a wave of global central bank cutting in an attempt to offset the economic damage from the COVID-19 pandemic.

 

It also follows an announcement by President Cyril Ramaphosa on Thursday that SA’s 21-day lockdown has been extended until the end of April.

Repo rate reduction will help ease economic pain – particularly after lockdown restrictions are lifted

Dr. Andrew Golding, chief executive of the Pam Golding Property group

“In an unexpected but welcome announcement, the Monetary Policy Committee today (14 April 2020) announced a further 100bps cut in the repo rate, reducing it to just 4.25%. This will result in a further reduction of the prime rate to 7.75%, which is the lowest prime rate since the four months (July to October) in 1973 when the prime rate was just 7.5%.

However, at that time, the prevailing consumer inflation rate was higher than the prime interest rate at 8.9%, which meant that the real (inflation adjusted) prime rate was actually negative at an average rate of -1.8% during this period.

In comparison, the most recent consumer inflation rate – at 4.6% - remains below the prime rate, meaning that the real prime rate remains in positive territory. Nonetheless, the substantial cumulative easing in interest rates thus far this year – 225 bps in total – is now offering significant relief to homeowners and indebted households.

While this will not offset the negative effects of a total loss of income for those not able to work from home or those not designated as an essential worker, the MPC’s latest move will go some way towards easing the pressures on the residential housing market in regard to those with mortgages or seeking finance in order to acquire a home – helping to pave the way for recovery once the lockdown restrictions begin to ease and economic activity begins to recover.

From a property perspective, it is hoped that part of the easing of lockdown restrictions will include reopening or at least partial reopening of the Deeds Office which will enable transfers to be processed regarding successfully concluded sales transactions, which would aid indebted, distressed sellers already severely impacted by the current economic recession. Furthermore, the freezing of the property industry, which is currently in limbo to a large degree, means that government is precluded from receiving much-needed revenue from transfer duty, which is a significant contributor to SARS.

Currently, buyers who are in contact with our agents - who are all operating remotely - can enter into negotiations regarding a purchase with suspensive conditions for when they are able to view the property and can confirm the sale.”

Bold action welcomed

“I highly commend the MPC for acting so boldly by cutting interest rates by a further 1% to help ease the financial burden South Africans face during this lockdown period. I think it was a timeous decision and I applaud the committee for taking such proactive measures to help consumers and small businesses survive within the current circumstances,” says Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett.

“Though this decision will have negative consequences for the rand, I believe that the upside benefits outweigh the downside risks that this cut poses for our economy. The immediate relief this decision provides to both consumers and businesses is exactly what our country needed at this time,” he adds.

 

“South Africans would be wise to use this cut to pay off debt as quickly as possible. If you can afford to do so, keep your repayments at the same value before the cut. If you were paying R10,000 per month, then continue to pay this amount so that you can shorten your loan term and save on interest charges. If you cannot afford to do this, then use the money you save on interest charges to avoid purchasing items on credit and getting yourself into further debt,” Goslett advises.

 

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