Mbabane: Businesses, and the general public will know before the end of the week if the Central Bank of Eswatini’s (CBE’s) Monetary Policy Consultative Committee (MPCC) will slash the Discount Rate?
Head of Strategy and Communication at the CBE, Zithulele Gina told Independent News that the MPCC will definitely meet before the end of the week to decide on the country’s monetary policy amid the outbreak of the incessant and persistent COVID-19 pandemic. This publication wanted to know if the CBE would follow on the heals of Africa’s second economic powerhouse-South Africa’s Reserve Bank which slashed its discount rate by 100 basis points or one percentage point from 5.25 percent to 4.25 percent. South Africa’s cut will go into effect on Tuesday, April 15.
This comes after the bank brought the scheduled May meeting of its Monetary Policy Committee forward to respond to the impact of the coronavirus pandemic on SA’s economy. The repo rate is the benchmark interest rate at which the Reserve Bank lends money to other banks. The bank’s decision will also lower the prime lending rate to 7.75 percent.
Reserve Bank Governor Lesetja Kganyago, when delivering the monetory policy statement on Tuesday, said since the March meeting of the MPC, the Covid-19 pandemic had spread globally, with its impact being felt through all economies.
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.