INTEREST RATE CUT BRINGS RELIEF

MBABANE - Consumers with debt are likely to breathe a sigh of relief as the interest rate has finally gone down by 25 basis points.

On Friday, the Central Bank of Eswatini (CBE) Governor, Dr Phil Mnisi, announced that taking into consideration relevant global regional, and domestic economic factors; as well as the price and financial stability mandate, the bank decided to reduce the discount rate by 25 basis points to 7.25 per cent effective September 21, 2024. The interest fell after staying at 7.50 per cent since last year July. In simple terms, interest rates are the cost of borrowing money. The most immediate benefit of a drop in interest rates is a reduction in the cost of borrowing. This applies to loans of all types, from equipment financing to lines of credit.

Policy

Dr Mnisi said banks are expected to reduce the prime lending rate on loans extended to individuals and businesses to 10.75 per cent, until the next monetary policy meeting. The local banks have already issued notices affirming that indeed, they are cutting their prime rates to 10.75 per cent and this adjustment impacts all variable lending rates. This is good news for consumers, as it likely means lower interest rates on mortgages, car loans and credit cards, making it more affordable to borrow and spend. According to economists, interest rate cuts will have a positive impact on consumer spending. With more money left in their pockets after debt repayments, consumers may be more inclined to spend on goods and services, which can benefit businesses across various sectors.

This is particularly relevant for small and medium - sized enterprises (SMEs), which cater to a local customer base. Improved consumer sentiment can lead to a boost in sales and revenue generation. Furthermore, when the CBE lowers interest rates, it becomes cheaper for businesses to take out loans. This can have a domino effect on various aspects of companies’ operations. With lower interest rates, the overall cost of repayment becomes more manageable, freeing up valuable cash flow that can be reinvested back into businesses.
This can be particularly advantageous for SMEs in the country, which may be looking to expand their operations, invest in new technology or even hire additional staff.

Investment

Economists said lower interest rates can stimulate the overall economy. Businesses are more likely to borrow and invest when the cost of borrowing is lower. This increased investment leads to job creation, higher productivity and ultimately, economic growth. Increased business activity across various sectors creates opportunities for collaboration and fosters a dynamic business ecosystem.

Domestic

In his statement, the governor highlighted that domestically, economic activity as measured by the quarterly gross domestic product grew by 7 per cent year-on-year (seasonally adjusted) in the fourth quarter of 2023, following a revised growth of 6.8 per cent in the third quarter. He stated that the primary sector contracted by 5.8 per cent in the fourth quarter of 2023, compared to a 1 per cent growth in the previous quarter. The contraction was due to a decline in forestry and animal production. The secondary sector contracted by 1.5 per cent in the fourth quarter of 2023, from a growth of 1.6 per cent in the third quarter, while the tertiary sector grew by 11.9 per cent in the fourth quarter of 2023, following a 11.6 per cent growth in the previous quarter.  

On the global front, economic growth remains broadly subdued. In advanced economies (AEs), the United States (US) economy grew by an annualised 3 per cent in the second quarter of 2024, while the United Kingdom (UK) and Eurozone (EU) recorded marginal growth of 0.6 per cent and 0.2 per cent, respectively, in the same period. Among the emerging markets and developing economies (EMDEs), China recorded a steady growth of 0.7 per cent in the second quarter of 2024.

Patterns

Though inflation in AEs and EMDEs has generally moderated, it exhibits mixed patterns and remains above target (an average of 2 per cent) in some economies. Upside risks to the outlook persist, which include among others, geopolitical tensions that may lead to perpetuated supply chain disruptions. Global monetary policy conditions have been broadly easing with AEs including the UK, EU and the US having started reducing their interest rates. On the regional front, the South African economy grew by 0.4 per cent in the second quarter of 2024, following a revised flat reading in the first quarter, as the country experienced no load-shedding throughout the entire quarter.

The South African Reserve Bank (SARB) maintained its growth forecast for 2024 at 1.1 per cent, while the forecasts for 2025 and 2026 were both revised up by 0.1 percentage point to 1.6 per cent and 1.8 per cent, respectively. South Africa’s annual inflation rate fell to 4.4 per cent in August 2024 from 4.6 per cent in July 2024, going below the SARB’s target of 4.5 per cent. The SARB revised down its short-medium term inflation forecasts to 4.6 per cent (from 4.9 per cent) for 2024, 4. per cent (from 4.4 per cent) for 2025 and 4.4 per cent (from 4.5 per cent) for 2026. The SARB reduced the repo rate by 25 basis points to 8 per cent in its September 19, 2024, MPC meeting.

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