Junk Status and its effects on the repo rate

25 May 2017

South Africa has been well known for its unstable economic status. Furthermore, the recent political slums such as the reshuffling of the cabinet-which is believed to have been politically motivated– has contributed to the Junk credit status for the country. Economists argue that the consequences thereof of this status affects everyone. For instance, South Africa’s junk status means that it is not attractive to investors, which implies less opportunities for jobs. Furthermore, current investors might also pull out their investments. In the long term, this will lead to higher interest rates making bond instalments very high to afford. Simply put, all prices will rise.

All of the above mentioned economic and political occurrences have led to many economists thinking that the repo rate will remain the same. For one, the uncertainty around the rand value has made the monetary policy committee very vigilant about making any changes in the policy (Tinyiko Ngwenya, 2017).Furthermore, at the last MPC meeting it was indicated that the South African Reserve Bank (SARB) was at the end of the hiking cycle and the rand was affected badly. However, if the SARB were to improve the repo rate before the next credit rationing, and the results come out with “two notch downgrade to sub-investment grade” then the rand value would be adversely affected.

One might argue, since the repo rate has remained the same for way too long and there might be interest rate cuts. However that seems very unlikely unless there would be changes in the inflation downward spiral.

Lastly, with the recent political haziness, it is highly unlikely for the MPC to change the repo rate. Morever, customers need to prepare themselves for the worst economic changes, and further implying that they should be vigilant about their bugdets. The key is always not to spend on what you do not necessarily need. Customers need to keep these three words in mind: Save, Save and Save.

{Author: Zimkhitha Xauka]