Home Entrepreneurs Agribusiness Steady interest rates 'positive for agri in tough times'

Steady interest rates ‘positive for agri in tough times’

The South African Reserve Bank leaves the repo rate unchanged at 3.5% as inflation fell in 2020. FNB senior agricultural economist Paul Makube says lower rates are positive for the agricultural sector, 'especially at the height of agricultural activity and increased credit demand'

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The agricultural sector has welcomed the South African Reserve Bank’s decision to keep the repo rate unchanged – a much-needed lifeline for farmers who want to do repairs or invest in agricultural equipment.

Governor Lesetja Kganyago announced the monetary policy committee’s resolve to hold the repo rate at 3,5%. This decision is in line with market expectations following the release of the December consumer price inflation figures by Statistics South Africa. This shows inflation was the lowest in 16 years.

Paul Makube, senior agricultural economist at FNB. Photo: Supplied
Paul Makube, senior agricultural economist at FNB. Photo: Supplied

“The lower rates are positive for the agriculture sector, especially at the height of agricultural activity and increased credit demand,” says Paul Makube, senior agricultural economist at FNB Agri-Business.

“Strong commodity prices have also helped keep farmers afloat, although there are pockets of Covid-19-induced challenges, such as the wine value chain.”

The prime lending rate at commercial banks remain at 7%, says Kganyago.

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He adds that expectations of future inflation “appear more stable after sustained moderation last year, although those of households continue to moderate from quite high levels. The committee notes that the slow economic recovery will help keep inflation below the midpoint of the target range for this year and next.”

Implications for farmers

Makube says although the inflation outlook remains subdued below the mid-point of the 3% to 6% range, the Reserve Bank’s forecast model points to a potential 50 basis hike in the second and third quarters of 2021.

The current unchanged repo rate and extended reprieve, however, is good news for farmers, he says. “The extended reprieve will provide an opportunity for farmers to do the necessary refurbishments and replacement of machinery and equipment.

“Record low interest rates coupled with strong commodity prices boosted machinery sales for 2020. This saw robustness in tractor and combine harvester purchases with increases of 8.9% and 25% respectively (on a year-on-year basis).”

Makube believes another strong agriculture output will limit further upside in food inflation. “This is positive for overall consumer inflation in the year ahead. We still expect the agriculture sector to post another stellar performance during 2021.”

A lost opportunity?

Meanwhile Professor Raymond Parsons, an economist at the North-West University Business School, believes the monetary policy committee failed to give the economy the injection of confidence it needs.

The balance of risks on both the inflation and growth fronts have therefore recently shifted in ways which would have allowed for an additional cut in interest rates of, say, 25 basis points at little risk to the Reserve Bank’s anti-inflation mandate. The burden of proof for a central bank cannot be absolute certainty. Even a small further positive move on borrowing costs at this stage would have sent an affirmative message to the economy.”

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Staff Reporter
Staff Reporter
Researched and written by our team of writers and editors.
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