Steep rate cut a welcome surprise - but Reserve Bank may still need to cut more

The reduction in South Africa's interest rate by one percentage point - which brought the country's prime lending rate to levels last seen around 2013 - was a bold move by the South African Reserve Bank, and shows that the central bank realises the devastating impact that the coronavirus will have on the economy, analysts and the business community said on Thursday. 

The central bank said the decision was unanimous, and it hoped it would go some way in easing financial pressure on households and firms, improving resilience. 

The last time the interest rate was cut by a full percentage point in one meeting was in 2009, during the global recession. 

"Although I was one of the people who called for a 1% reduction, it is quite a surprise, but a positive one, given the weak global growth and the fact that inflation is probably heading towards 3% over the next few months," said Johann Els, head of economic research at Old Mutual.

But Els thinks the bank will need to cut rates more during the year, because its forecast that South Africa’s GDP would only shrink by 0.2% for the year is still higher than what many economists expect. He said his own projections show that South Africa’s GDP would shrink by around 2% in 2020.

"They will probably need to do more, but I take the fact that things are pretty uncertain at the moment, and they would probably want to hold back to see how things unfold."

He said South Africa still has more room to cut its interest rates, unlike other economies in Europe who may be forced into quantitative easing.

The rate cut is good news for the property sector, as it will reduce mortgage interest rates, increasing affordability among consumers, said industry players.

"This cut will help when the recovery starts," said Seeff Property Group chair, Samuel Seeff. He said the rate cut will also provide much-needed relief for small businesses when it comes to servicing their debt and property loans.

Marcél du Toit, CEO of Leadhome, said the cut will result in a much more positive buyers’ mindset and give the market the boost it needs. "We believe that the cut of 100 basis-points is necessary and will support much needed economic growth. While the rate has not been cut at sequential meetings since 2010, there are pressures for the bank to ease monetary policies," he said.

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