The Steel and Engineering Industries Federation of Southern Africa (SEIFSA) welcomes today’s decision by the South African Reserve Bank to reduce the repo rate by 25 basis points, to 3.5%, SEIFSA Economist Marique Kruger said this afternoon.
“The decision to further cut interest rates is encouraging and will provide impetus for struggling business needing some financial support or loans from commercial banks in order to stabilise cashflows and stay afloat during these difficult times,” Ms Kruger said, following the Reserve Bank’s announcement.
Ms Kruger added that the decision also has the potential to stimulate spending from beleaguered consumers and boost the derived demand for the intermediate products of the Metals and Engineering Sector as individuals may now have some disposable income.
“The expansionary monetary policy intervention is generally good for the broader domestic economy. Due to its direct benefit in improving the cost of production for local businesses, it will ultimately stabilise economic growth and prevent the country from sinking into a depression. Therefore, the decision by the Reserve Bank is encouraging, especially given the urgent need to stimulate local demand and improve on the ever- weakening trends in industrial production.
“Although the extended benefits of the rate cut may not immediately accrue to businesses, which are severely affected by the coronavirus-induced economic lockdown, the decision still bodes well for business, investor and consumer confidence. These elements are crucial for vibrant industrial production, with extended benefits for the broader metals and construction industries,” she said.
However, Ms Kruger believes the interest rate cut could have been bigger.
“Although SEIFSA welcomes the decision by the Reserve Bank to reduce the repo rate, it would have been better if the Bank had cut the interest rate by a larger 50 basis points to immediately stimulate domestic demand and provide more stimulus to an ever- deteriorating domestic outlook,” she said.
Despite the recommendation for a much more hawkish approach by the Bank, its decision still provides some relief for beleaguered businesses which face a multitude of challenges underpinned by subdued demand, increasing input costs and operational expenses, against the backdrop of the persistent COVID-19 pandemic.
“Hopefully, today’s rate cut will provide a leeway for local businesses to fully focus on implementing various interventions aimed at reducing operational costs, improving business activity and competitiveness, and ultimately ensuring their sustainability,” Ms Kruger concluded.