Rate cut good news, but don't get too excited - economists

The SA Reserve Bank's decision to cut the repo rate by 0.25% has been met with cautious optimism by analysts, who – while welcoming the move – have warned that relief is more likely to be short-term, and that room for further easing is limited.  

FNB chief executive Jacques Celliers said the rate cut – which would mean a reduction in the prime lending rate from 10.25% to 10% – would assist cash-strapped consumers in coming months, but cautioned the public not to rush into borrowing.

"Following a contraction in GDP during the first quarter, we look forward to improved conditions later in the year based on expectations of a good rebound and this, coupled with lower interest rates, may aid the anticipated recovery.

"However, the SARB is correct in its stance that interest rates alone are not a primary driver of the economy, consumers will have to continue managing their expenses prudently. I urge consumers to take every opportunity to reduce expenses as lower interest rates create an opportunity to build a buffer into their budgets when they consider long-term loans for a house or a new car," he said.

He advised consumers to weigh up the cost against the benefits of long-term loans. "Sensible borrowing is a valuable financial tool to enable important moments in a consumer’s life such as housing, education and unexpected emergencies. Loans should be used in a way that balances the cost of long-term gains with day-to-day living expenses,” he said.

Further easing?

Mamello Matikinca-Ngwenya, FNB Chief Economist, said the central bank's decision to cut the repo rate by 25 basis points was in line with expectations. "Weak domestic demand and the inability of corporates to pass on costs to consumers should keep inflation contained," she commented.

SA should not expect a "meaningful improvement" in growth in the year ahead, she added. "We expect growth to lift to 1.2% in 2020 from 0.5% in 2019, as such muted inflationary pressures along with very weak growth point to a more accommodative monetary policy stance."

Matikinca-Ngwenya argued that a global shift towards more accommodative monetary policy – with the Fed expected to ease rates as well – had provided room for easing monetary policy in SA.

"While we believe there is scope for another rate cut, the bank will, however, need to assess fiscal risks before attempting to ease policy further," she said.

Peter Kent, Co-head of Fixed Income at Investec Asset Management, said the cut was in line with "our long-held view that the SA economy is experiencing sustained disinflation, driven by the lack of demand in the economy and the SARB’s determination to get inflation to the middle of the target band at 4.5%".

"The SARB has long maintained that the impediments to growth are structural rather than cyclical, and that South Africa needs reforms rather than rate cuts. While this view holds true, it appears that they are finally acknowledging that there may be a cyclical element to the growth slowdown too and have accordingly responded by easing policy," Kent said.

However, he added, it would be necessary to "maintain a careful balance" in the months ahead. According to Kent, this means the degree of easing that is realistically possible is limited.

"While there is a strong argument from a cyclical perspective to cut further, South Africa’s litany of structural problems means that the extent to which they can ease has a floor – in our view at between 50 and 75 basis points overall," Kent argued.

"More than that would require a meaningful improvement in the structural impediments to growth. For now, we are simply too dependent on foreign capital to fund our fiscal and current account deficits."

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