The Monetary Policy Committee of the SA Reserve Bank has announced it will cut the repo rate by 25bps from 6.75% to 6.50%.
“Since the previous meeting of the Monetary Policy Committee (MPC), the risks to the inflation outlook have subsided somewhat,” it said in a statement on Wednesday afternoon (28 March).
“Inflation outcomes in recent months have remained well within the inflation target band, although this likely represents the low point of the current cycle.
“While the increase in the value-added tax (VAT) rate to 15% places temporary upside pressure on inflation, this is mitigated by the stronger exchange rate which has contributed to the changing inflation risk profile,” it said.
Fifteen of 22 economists polled by Reuters said the bank would cut interest rates by 25 basis points, while two forecast a cut of 50 basis-point. The remaining five said there would be no change, Reuters reported.
Following the rate cut, the rand traded at the following levels against the majors:
- Dollar/Rand: R11.74 (0.76%)
- Pound/Rand: R16.56 (0.54%)
- Euro/Rand: R14.50 (0.30%)
Speaking on how the rand was expected to react to the cut, Alet Opperman of TreasuryOne said that in theory whenever there is a rate cut, the rand should weaken as investors will lose out on interest and the rand will lose some appeal in the carry trade market.
“That is in theory, we all know that theory rarely compliments reality and there are a fair few among us that believes the rand will strengthen after the rate cut,” she said.
“The feeling is that the bond market priced in a fair amount of risk in South African bonds in the past four months and seeing that those risks have waned the bond market needs to correct itself as South Africa is becoming the darling of the EM countries again.”
The cut also saw the base home loan rate reduced from 10.25% to 10%, which will prove a welcome boost for the economy and property market according to the Seeff Property Group.
Samuel Seeff, chairman of the group said the cut will provide much needed stimulation for the property market and, after a very flat 2017, will hopefully be an energy boost to encourage buyers and investors.
Although the rate cut was largely expected, Seeff said that it is a welcome reprieve for consumers and property owners who face higher living costs due to the 1% VAT hike taking effect on 1 April.
“Things have moved quite fast since the last interest rate meeting. The election of Cyril Ramaphosa as President of the ANC and of SA has been a very positive development for country, economy and property market.
“Action around State Capture, the prosecution of Jacob Zuma and the Cabinet shuffle to return confidence to major sectors of government have all been well received by the market, business and the ratings agencies.
“Moody’s has for example just announced that it is keeping SA’s sovereign credit rating at investment grade and upgraded the economic outlook to positive,” he said.