South African Reserve Bank cuts repo rate to 5.25%

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The repo rate is the rate at which the central bank lends money to commercial banks

The South African Reserve Bank (SARB) Governor Lesetja Kganyago has announced that the repo rate will be reduced by 100 basis points to 5.25%.

The repo rate is the rate at which the central bank lends money to commercial banks.

The decision follows this week’s Monetary Policy Committee meeting.

Kganyago cited a fragile domestic economic outlook, with the economy expected to contract this year and therefore it needed a boost.

“The MPC decided to cut the repo rate by 100 basis points. This takes the repo rate to 5.25% per annum with effect from 20 March 2020. The decision was unanimous.”

He said inflation was under control and no surprises were expected.

“Barring severe and persistent currency and oil shocks, inflation is expected to be well contained, remaining below the mid-point of the target in 2020 and close to the mid-point in 2021.”

The cut is the second this year after January’s 25 basis point reduction to 6.25%. In July last year, the bank reduced the repo rate by 25 basis points to 6.5% and it was kept unchanged in September and November.

The prime lending rate, the figure charged by banks to customers, has been cut to 8.75%.

The Reserve Bank is under pressure to help arrest the economy’s downward spiral. South Africa is already in recession, and the fall-out from business disruption due to the coronavirus crisis will be significant.

At least one analyst expects that the economy could shrink by more than 2% this year.

A rate cut could hurt the rand – lower interest dents its investment appeal – but SARB governor Lesetja Kganyago said the steep cuts in interest rate cuts in other economies have created space for the bank to address the rapidly deteriorating state of the South African economy. 

Last week, the US central bank cut its rates to close to 0%. Other banks have followed.

The Reserve Bank was also helped in its decision by a collapse in oil prices.

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