- The SARB unexpectedly cut the repo rate by 100 basis points to 4.25%.
- It is still far above the (often negative) rates offered in developed economies.
- Local rates could still go lower.
- For more stories go to the Business Insider South Africa homepage.
In a surprise move - the next monetary policy committee meeting was still more than a month away - the South African Reserve Bank (SARB) announced a large 100 basis point cut in the repo rate.
This means the repo rate, or the rate at which the Reserve Bank lends money to commercial banks, is now at 4.25% - the lowest since it was introduced in 1998.
A lower interest rate can be negative for a currency. Some traders hold the rand to earn its fat interest rates, and following the rate cut on Tuesday, the rand lurched from around R18.00/$ to R18.32. By early afternoon it recovered somewhat to R18.23.
Even after the large cut, South Africa's interest rate remains solid in a world where some lenders are paying others for the privilege of lending money to others.
The European Central Bank's official bank rate is now negative 0.50%, while Japan and Switzerland also have negative official interest rates.
Here's how South Africa's repo rate compares:
Across the world, central banks have been slashing rates in an effort to bolster coronavirus-affected economies.
Investec group economist Annabel Bishop says South Africa’s interest rate cut is in line with interest rates cuts across the world which have been trending towards 0% due to Covid-19.
She believes the SARB may decide to cut interest rates further, depending on whether other central banks go lower.
Announcing its rate cut, the SARB said the developed economies have larger policy space to implement initiatives to support their economies, while those in emerging markets have less policy space and credit is more expensive.
International financing institutions such as the International Monetary Fund (IMF) and World Bank have therefore made available extraordinary levels of emergency financial support, the SARB said.
On Tuesday morning, finance minister Tito Mboweni said South Africa is currently considering a loan facility of $60 million (R1.1 billion) from the World Bank.
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