By George Obi, April 17, 2020, Article/news
SOUTH AFRICA-On Tuesday the 14th of April 2020, the governor of the Reserve Bank of South Africa (SARB) announced that the reserve bank monetary policy committee (MPC) has decided to cut the repo rate by 100 basis point thereby bring the repo rate down to 4.25% from 5.25%.
Less than a month ago, on the 19th of March 2020, the MPC slashed the repo rate by 100 basis point to 5.25%. This was at the wake of the novel corona virus in South Africa. The latest reduction in repo rate brings the repo rate to its lowest in South African history.
What does this mean for households and businesses?
On the surface, this is good news for all borrowers because the repo rate is the fundamental basis of all formal interest rates in the country. As a result of the reduction in repo rate, the prime rate will also adjust to 7.25%. For borrowers whose debt is linked to the prime rate, there will be some relief. Current borrowers will have extra money in their pocket because of the revised lower repayment.
More so, the reduced interest rate will encourage households and businesses to borrow and spend.
The spending is good for the economy; it will help boost demand and gross domestic product (GDP). However, borrowers should be cautious with their spending behaviour; there is no need for a spending spree – yet. The ongoing covid-19 pandemic still has much to teach us; therefore, we don’t want to be caught unprepared should the bend become sharp. Borrowers should rather continue with their current repayment plan; this will help reduce their debt significantly over a period of time. Households and businesses shouldn’t jump-in on the borrowing tirade except for valuable reasons. Don’t forget that the interest rate will not remain low forever, as the economy improves, the interest rate will be reviewed. If you take up unnecessary long-term debt now, you may end-up in financial distress when the world recovers from the economic dazzles of Covid-19.
George C. Obi, is a Senior Consultant at Dynametrics Consulting , writes from Nelspruit, Mpumalanga
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