The Central Bank of Eswatini (CBE) decided to go against the grain last week by slashing its Repo Rate by 25 basis points to 7.5%. In the same week however South Africa decided to keep theirs steady at 8.25%. The change in Eswatini has effectively increased the interest rate spread between the two countries by 75 basis points, which is not unusual especially in the context of years past.
The reduction will essentially mean that debt in South Africa will continue to be expensive while in Eswatini it will come down commensurate with the revised bank rate.
Business Eswatini welcomes the decrease and would like to applaud the Central Bank of Eswatini for their confidence in their own independent monetary policy stance. While South Africa is Eswatini’s main trading partner but one would however find difficulties in establishing fundamental indifferences between the two economies that would empirically justify pegging the two countries’ interest rates to be exactly the same. As such, the spread of 75 basis points between the countries’ interest rate environments actually speak to the distinctiveness of Eswatini’s approach to reviving the economy from its depression especially after the pandemic.
BE have been assured by the Central Bank that various scientific and econometric models were extensively tested under various scenarios to establish the validity of the CBE’s theory to recommend a cut to the MPCC. Consequently, the decision eventually taken by the MPCC to slash the rate by 25 basis points in its recent sitting was predicated on these models.
One of the key fears which is uppermost on everyone’s mind was the possibility of capital flows which could be buoyed by the interest rate cut. This was on the basis that, naturally, investment capital tends to chase after high returns. BE was advised that this risk was considered in depth and mitigation measures already put in place by the CBE to discourage capital outflows.
BE’s position is that Eswatini’s economy stands to benefit from this reduction especially after many cycles of interest rate increases which had begun to seriously undermine the country’s gross domestic product. Companies around the country have been languishing under an expensive debt burden and any form of relief under these circumstances, be it monetary or fiscal, is welcomed by the private sector.
Some people would argue that 25 basis points is too negligible to make a big difference, and they would be correct to some degree. However, to companies with big overdraft facilities and consumers with massive mortgage payments, the difference they would see in their repayments would not be anything to sneeze at.
Of course, as BE, we hope this could be the beginning of many cycles in which interest rates will steadily go down in the coming months. For now though, we welcome the change however insignificant it may be. And we again applaud the Central Bank for taking this informed decision.