“That’s very good news!” says Dawie Maree, FNB’s head of agricultural information and marketing, about the 25 basis points by which the Reserve Bank has lowered the repo rate. “I didn’t expect that.”
By Jasper Raats, senior journalist at African Farming and Landbouweekblad
Lesetja Kganyago, governor of the South African Reserve Bank, announced the repo rate will be reduced by 25 basis points to 7% with effect from 1 August. The decision by the monetary policy committee was unanimous.
Kganyago says the economy showed a slight recovery in the second quarter of this year after weak growth of just 0.1% in the first quarter. Despite this, structural problems, such as bottlenecks in logistics, continue to hamper growth.
Inflation was at 3% in June – at the lower end of the Reserve Bank’s target range of 3% to 6% – and core inflation at 3.9%. The rand has strengthened and inflation expectations have cooled. Kganyago warns, however, that food and fuel prices could push inflation back up to an annual average of 3.3% in the coming months.
In a major policy shift, the Reserve Bank has indicated it will henceforth aim to stabilise inflation at 3% – the lower end of the current target. “We believe the existing inflation target of 3% to 6% is too broad and too high,” says Kganyago. Lower inflation, he believes, will ultimately create room for further interest rate cuts and better long-term conditions for growth.
Silver Lining
Maree says this offers some relief, especially for capital-intensive export industries such as citrus, with the 30% import tariff imposed in the US from midnight.
The unexpected reduction in interest rates provides relief for the entire agricultural sector, whose debt burden has grown by 67% over the past ten years at a compound annual growth rate of about 5.8% per year.
According to the Department of Agriculture’s latest statistics for 2023-’24, agricultural debt in South Africa amounted to R205 billion and Maree estimates it is now closer to R211 billion. “The reduction means a saving of about R125 million per year for the agricultural sector,” says Maree.
He says this reduction in interest rates offers farmers the opportunity to improve their debt-to-equity ratio if necessary. He advises farmers not to spend money on unproductive assets now. “Instead, buy assets that earn you money,” he says.
Maree also warns the price of diesel will probably increase in August and that farmers can only hope for a drop in fuel prices again in September.
He says given all the problems in agriculture, he believes the reduction in interest rates will still inspire some investor confidence in the sector, especially in agricultural businesses.
