No Repo Rate Cut expected, but perhaps needed

The SARB is set to announce its decision on whether or not to decrease the repo rate even further, this Thursday, the 23^rd of May. The repo rate has been stable, at an unprecedented low of 5%, since the Monetary Policy Committee meeting of July 2012.

At present no one is seriously expecting Reserve Bank governor, Gill Marcus, to lower either the repo rate or the prime interest rate (which currently sits at 8.5%) before October, at the earliest. “The question isn’t whether the MPC will lower the repo rate now, which I don’t expect them to, but rather whether now isn’t perhaps the time to do it”, says Jan le Roux, CEO of Leapfrog Property Group. 

Andre Mellet, economics lecturer at the Northwest University’s Vaal Triangle Campus, told Business Day that there are a number of compelling arguments for a rate cut: the growing unemployment figures, the slow growth rate of the SA economy as well as the deficit on the government’s budget are all good reasons to opt for a rate cut – in favour of economic growth. The continued malaise of the global economy is also likely to put more pressure on the SARB.

That said Mellet believes that the MPC is primarily concerned with price stability and the control of inflation, not with economic growth.

“A rate cut could give home owners a bit of breathing room in which to consolidate their debts. Household debt is still far too high in South Africa and, as we all know the rates will have to go up again at some point, now is the time to clear as much debt as possible. A rate cut would certainly make this easier”, believes le Roux.

However, Matthew Sharrat, Bank of America Merrill Lynch global research South Africa economist, told Business Day that they’re expecting both international and local economic growth in the second part of the year.

“Should Sharrat and co’s predictions prove accurate, and the economic situation worldwide does improve, then a rate cut wouldn’t be as necessary”, says le Roux. He continues to point out that a rate cut in the interim would still ease pressure on households contending with increase rates, electricity and higher consumer price inflation.

Jan reiterates; “Regardless of a rate cut now, or in the future, I strongly advise home owners to cut down on unnecessary spending and debt as much as possible. The economic situation, both domestic and international, is far from stable and the best defence against future hardship is to cut down on debt”.