PRIME RATE SET FOR ANOTHER DROP

MBABANE – Extraordinary times call for unusual measures. For the second time in less than a month, the Central Bank of Eswatini (CBE) has been forced to slash the discount rate.

The CBE, together with the Monetary Policy Consultative Committee (MPCC), held an extra ordinary meeting in light of the current economic developments, especially the COVID-19 pandemic effects, to consider the appropriate monetary policy stance. The bank decided to cut the discount rate by 100 basis points (one per cent) effective April 16, 2020. It is now at 4.5 per cent from 5.5.  This follows another cut by the same percentage on March 20.
As predicted, the country has just followed in the footsteps of neighbouring South Africa to cut the interest rate again. This is as per a correspondence from CBE Governor Majozi Sithole.

interest

On Tuesday, South Africa’s Reserve Bank also cut the interest rate by 100 basis points. It is now at 4.25 per cent.
With the country’s currency, Lilangeni, pegged to the Rand, Eswatini has just followed suit so that its policy decisions are aligned to that of South Africa.
The cut is good news to individuals and companies with loans. Local commercial banks will reduce their lending rates on loans and businesses until the next monetary policy meeting. In reaction to the CBE’s interest cut, the banks are expected to also reduce their prime rate by at least a per cent. It is currently at nine per cent.  Last month, the prime lending rate dropped from 10 to nine pe cent.  

Experts say the reduction is aimed at making it easier for banks to lend money to businesses facing a steep and sudden drop in revenue due to the virus. Every time there is a cut in the repo rate, there is usually a decline in the interest rates on loans offered by various banks. It reduces one’s interest rate. This means payment of a lesser amount of interest. This brings down the overall cost of the loan.

benefitting

Apart from benefitting general borrowers, this also is a huge boost to the industrial sector. The reduction in the repo rate means that industries may be able to get loans at cheaper interest rates from lenders. This is likely to result in commodities becoming cheaper due to lower interest costs.
When it comes to mortgages, a rate cut can prove beneficial with home financing, but the impact depends on what type of mortgage the consumer has, whether fixed or adjustable, and which rate the mortgage is linked to.

Though the rate cut is likely to bring much-needed relief to consumers and businesses, there is scepticism that monetary policy alone can do much to buffer countries from the coronavirus-inspired crisis.

activity

“The MPCC noted on the global front, GDP growth is now projected to contract sharply by 3.0 per cent in 2020 due to the slowdown in economic activity as a result of the COVID-19 pandemic and recover to 5.8 per cent in 2021.
“On the domestic front, the economy is forecast to contract by 6.16 per cent in 2020 from forecast growth of 2.8 per cent previously. The short term-medium term growth outlook is expected to remain challenging as the economy grapples with the impact of COVID-19 on economic activity,”  noted CBE.

A local economist, Sanele Sibiya, who is a lecturer at the University of Eswatini, also highlighted that he expected the drop, but could not predict the possible figures for now, as there were trends to be monitored.
“Since these are extraordinary times, most of the things are predictable,” he said.

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