SARB lowers Interest Rates by -1.00%

SARB lowers Interest Rates by -1.00%

“Investing is the only business where when things go on sale, everyone runs out of the store…”

In an unprecedented move to counter the economic slowdown caused by Covid-19, the South African Reserve Bank (SARB) reduced interests today by a massive 1.00% yesterday – double what most had expected.

This move brings the Repo Rate (the rate at which the SARB lends to banks) to 5.25%, and the Prime Lending Rate down to 8.75%, with an indication that more interest rate relief is yet to come.

The challenge we are experiencing in markets, even after the -30% fall from the peaks of earlier this year, is not so much one of a ‘price’ discovery (where investors seek out and search for fair value, and market prices show some stability at lower prices) as much as a ‘liquidity’ discovery, resulting in indiscriminate selling and driving asset prices down by the margins we’ve seen. It is important to remember that the fair value of an asset is the sum of its discounted cash flows, and even though near-term cash flows are under immense pressure, even a year of lost earnings would probably reduce the value of most businesses by around -10% to -15% – much less than what prices have already fallen. Much like a coil-spring being squeezed, markets will rebound – the main question is when?

The interest rate moves underway are aimed at countering a slowdown, and simultaneously boosting access to credit for consumers and businesses, but the uncertainty created by the Virus will no doubt take a while before the normal course of daily lives resume…

As the financial-squeeze of slowing activity grinds its way into each of our homes, lower interest rates provide a window of opportunity to deleverage and pay down debts, improving one’s balance sheet. The concern for many now is that the primary damage of the Covid-19 Virus is not the illness itself, which thankfully most should survive, but rather the financial wrecking ball – something an already struggling economy like ours can ill afford.

Wishing you well, and may you and yours stay healthy over this time.