Don’t crack the champagne yet on not-so-spectacular rate cut

The long-awaited interest rate cut finally materialised this week — a not-so-spectacular 25basis-point drop, so don’t crack the champagne. It may, at most, put a couple of hundred rands into the pockets of consumers who are paying off debts. But it barely moved the needle for retail stocks. Investors know the likes of Woolworths, Massmart, Shoprite and Pick n Pay need a lot more spending power than that to lift sales. Data released earlier this week shows retail sales rose by a meagre 2.2% in May, higher than expectations but lower than the previous month. Economic growth is expected to have materialised in the second quarter (with the figures due to be released in early September), but this will come after a sharp contraction in the first quarter. For the year, the Reserve Bank is forecasting economic growth of just 0.6%. And along with the meagre growth, this week’s rate cut puts us back to where we were before the rate hike in November last year. We are treading water. The Reserve Bank’s monetary policy committee (MPC) has dampened expectations that another rate cut could materialise this year.

As Peter Attard Montalto, head of capital markets research at

Intellidex, said: “It is a fiddle cut and could be the only one with uncertain next steps … One left this MPC meeting scratching one’s head somewhat — did they actually cut? Why did they do it?”

And it is this uncertainty as to what is next that means this week’s rate cut will likely have little to no effect in spurring demand in the economy, which is desperately needed to, at the very least, safeguard existing jobs. Yes, the Reserve Bank’s main focus is price stability, but its website does say: “The primary purpose of the Bank is to achieve and maintain price stability in the interest of balanced and sustainable economic growth in SA.” So growth is certainly a factor it should take into account. A rate cut of 50 basis points would have given consumers and businesses more confidence to make purchases and invest, without which SA will continue to eke out such paltry economic growth that jobs will continue to be shed.

And Montalto says the Reserve Bank’s growth forecasts are “far too steep”, adding that “it seems to imply some magical animal spirits arising next year to bring growth from 0.6% to 1.8% [next year] and 2%” the year after. State-owned enterprises are seen as a factor that could heighten risk ahead of the MPC meeting in September, but it is because of this risk — and the drain that the likes of Eskom will continue to have on government finances — that the private sector (and consumers) should be supported and encouraged to invest and spend.

Lesetja Kganyago, the governor of the Reserve Bank, in his MPC statement says: “Continued low business confidence remains a concern for the MPC.” He adds that “investment prospects will continue to be limited in the absence of structural reforms”. But while the Reserve Bank’s view is that it is up to the government to introduce structural reforms to support economic growth and so facilitate the creation of jobs (and that is true), it is also a fact that Eskom has to be bailed out. This will not only weaken the government’s finances (along with support for other SOEs), it also means key state resources are focused on fixing this one entity. And in light of this, if there are other means to spur growth (such as a deeper rate cut), why are we not using them?

So it’s time to sober up to the reality of a continued weak economy, poor job prospects and little help from either the MPC or the government. And if there is extra money in your pocket after this week’s rate cut, use it to pay off debt while interest rates are marginally lower rather than incur more debt. Because you never know where we will be this time next year.

A rate cut of 50 basis points would have given more confidence