SA Repo Rate Slashed By 1%

Firstly, it is important to note that the primary goal of the reserve bank is to preserve the value of the Rand and thus keep the increase in prices of goods and services aka inflation as constant (read low) as practically possible.

With regards to the reserve bank’s decision to cut the REPO rate by 100 basis points or 1%, we should note that the global financial markets are in distress due to the Corona Virus Outbreak, amongst many other factors. 

 

Less developed countries such as South Africa are now perceived to be even more riskier investment destinations (people would rather put their money in safer 1st world/better developed and more stable countries/economies and safe havens such as gold, than South Africa or expect even higher returns if they decide to still invest in SA.

This has significantly contributed to the Rand losing value against major currencies and bonds, which are one of the ways National Treasury raises money for the country to supplement the budget deficit, effectively costing even more.

Fortunately, central banks (reserve banks equivalent) of other major countries including the US, have reduced their “REPO rates” significantly and therefore have helped soften the blow of people wanting to invest elsewhere because the returns they will make in these developed countries have become even lower. 

The lower oil prices have also come in handy to soften the blow of the weaker Rand. This, along with other factors such as weaker local demand – low demand low prices (think Economics 101), will help in keeping the inflation forecast low as fuel is one of the contributors to inflation as it is an input cost to most economic activities.

 

As a result of this view that inflation would not rise higher that the expected range (generally 3 – 6%), the reserve bank felt comfortable enough to reduce “interest rates”. This will result in people having more money available as a result of savings from existing credit facilities or improved access to and/or more affordable credit facilities, which will hopefully encourage people, including companies to spend more and stimulate economic growth – more spending in the economy leads to jobs and companies and individuals making more money and therefore government getting more taxes. If spent well, more taxes will mean more money available for government to build infrastructure and spend more on education and other social services. Of course, this is not a silver bullet and will still require other spheres of government to do their part in stimulating other economic activities.

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