Mbabane: The Central Bank of Eswatini has cut the discount rate by 100 basis points (1 percentage point) from 5.5 percent to 4.5 percent effective Thursday, April 16, 2020.
This was announced by the bank through a statement it issued after it held an extra ordinary meeting in light of the current economic developments, particularly the coronavirus disease (COVID-19) pandemic effects, to consider the appropriate monetary policy stance.
“The MPCC noted that on the global front, GDP growth is now projected to contract sharply by 3.0 percent 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,” reads the statement in part.
The bank went on to say that there is extreme uncertainty around global growth forecast as the economic fallout interacts with factors that are hard to predict. “These include the pathway of the pandemic, the extent of supply disruptions, shifts in spending patterns, confidence effects, behavioural patterns and volatile commodity prices, amongst others,” further reads the statement.
The bank noted that in light of this, risks of a worse outcome dominate, adding that inflation in advanced economies remains stable while global monetary policy is now largely accommodative in an effort to support economic growth.
The South African Reserve Bank has indicated that the South African economy is forecast to contract by 6.1 per cent in 2020 (from a 0.2 percent contraction presented in March 2020). The South African economy is forecast to rebound and grow by 2.2 percent in 2021. Consumer prices increased to 4.6 per cent in February 2020 from 4.5 per cent in January 2020. The inflation outlook has been revised down to 3.6 per cent (from 3.8 per cent) for 2020 and 4.5 per cent (from 4.6 percent) for 2021. The Discount Rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Central Bank through the discount window loan process.
With Lilangeni at par with the South African Rand and is tied to it at one-to-one exchange rate, decisions from the Reserve Bank might have an effect on Eswatini.
In March, the CBE lowered its discount rate by 100 basis points to 5.50 or one percentage point, along with other measures to support the economy in the short-to-medium-term due to the impact of the coronavirus while safeguarding the credibility of the exchange rate peg.
Should the MPCC decides to cut the discount rate by 100 basis points, it could decrease to 4.5 percent.
A cut of the discount rate will automatically have an impact on the Prime Lending Rate (9 percent) and Mortgage Rate, which all could decrease.
In addition to the rate cut, CBE on March 20 announced two measures to improve liquidity in the financial sector. It lowered the liquidity requirement for commercial banks to 20 percent from 25 percent and to 18 percent from 22 percent for development, and cut the reserve requirement ratio by 100 basis points to 5.0 percent. Should the discount rate be slashed by one percentage point, the prime rate will go down to 8 percent and Mortgage rate going down to 9 percent.
An interest rate cut is bad news for savers, but it is something of an unexpected gift for borrowers and investors.
Setting a high discount rate tends to have the effect of raising other interest rates in the economy since it represents the cost of borrowing money for most major commercial banks and other depository institutions. This could be considered a contractionary monetary policy. Exactly how much a high discount rate affects the economy as a whole depends on the relationship between the discount rate and the normal market rate of interest for loans to banks.
In part, interest rates represent the cost of borrowing money. When it is less expensive for banks to borrow money from the Central Bank, they can subsequently charge less interest on their own loans. This has a ripple effect on the demand for loanable funds everywhere unless the market rate of interest is equally as high.
Interest rates also coordinate savings in the economy. When too few actors want to save money, banks entice them with higher interest rates. Between savings and loans, interest rates help coordinate economic activity between different actors and different points in time. Savings represent a preference for future consumption over present consumption, while the opposite is true for borrowing. If the discount rate is raised too high, it could throw this coordinating mechanism out of balance.
More immediate impacts are felt from a high discount rate. Loans are more expensive, and borrowers have to work to pay off loans more quickly. This has the effect of taking money out of the economy, which could also cause prices to decline. Individuals are encouraged to save more. This leads to an increase in capital funding. Whether this helps or harms the economy depends on many other factors and is very difficult to gauge.
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