Lesetja Kganyago, governor of South Africa's reserve bank, speaks to reporters during an unveiling event for South African rand coin designs commemorating the 25th anniversary of democracy in Pretoria, South Africa, on Wednesday, June 5, 2019. South African Finance Minister Tito Mboweni backed the central bank’s existing mandate of targeting inflation only hours after the ruling party’s top decision-making body called on the government to expand the remit to include economic growth and job creation. Photographer: Waldo Swiegers/Bloomberg

Rates cut another 50bps – charts show SARB’s U-turn due to Covid-19

The economic fallout of the coronavirus pandemic has turned South Africa’s typically hawkish monetary policy committee into doves.

Published on:

21 May 2020, 3:53 am

The South African Reserve Bank has announced another 50bps rate cut, taking the repo rate to 3.75% and prime to 7.25%. Bloomberg reports the SARB has cut the benchmark interest rate by more than a third this year in a bid to support the economy that could contract by as much 16.1% due to the Covid-19 pandemic and a nationwide lockdown to curb its spread. The rand, which is benefiting from a weaker US dollar, is holding firm under R18.00 to the dollar – last trading at R17.81 to the greenback. – Editor

South Africa cuts key rate fourth straight time to record low

By Prinesha Naidoo

(Bloomberg) – The South African Reserve Bank cut its benchmark interest rate for the fourth time in four months in a bid to support an economy forecast to slump deeper into recession as a nationwide lockdown to curb the spread of the coronavirus halted most activity.

The monetary policy committee voted to lower the repurchase rate to 3.75% from 4.25%, Governor Lesetja Kganyago said on Thursday.

That's the lowest since the rate was introduced in 1998. Of the five panel members, three favored a 50 basis-point cut and two preferred 25 basis points of easing. All but one of 20 economists in a Bloomberg survey said the Reserve Bank would reduce the benchmark interest rate, with predictions for the cut ranging from 25 to 100 basis points.

Key Insights

The central bank sees the economy contracting by 7% in 2020, even worse than its previous estimate of a 6.1% decline in output, as a result of the prolonged business restrictions that started on March 27. Output could increase by 3.8% next year and 2.9% in 2022, Kganyago said.
The MPC prefers to anchor inflation expectations near the 4.5% midpoint of its target band and consumer-price growth is now set to average 3.4% this year, compared to the April projection of 3.6%. The average rate will peak at 5% in the second quarter of next year and remain inside the target band until at least the end of 2022.
The central bank's quarterly projection model now forecasts a repurchase rate of 3.63% by the end of this year and 4.1% by the end of 2021.
While the Reserve Bank has been criticised by politicians and labour unions, who say it should be doing more to boost growth and help reduce the country's 29% unemployment rate, it has already lowered the key rate by 275 basis points this year and more than doubled its holdings of South African government debt, helping to bring down borrowing costs in the domestic market.

Charts show South African central bank 'U-turn' due to virus

By Prinesha Naidoo

(Bloomberg) – The economic fallout of the coronavirus pandemic has turned South Africa's typically hawkish monetary policy committee into doves.

The five-member panel, headed by Governor Lesetja Kganyago, has cut the nation's benchmark interest rate by more than a third this year and again eased policy on Thursday in a bid to support an economy that could contract by as much 16.1% due to the virus and restrictions to curb its spread.

Yet another reduction in the rate is "quite a U-turn" in the stance of a committee that often cited concerns about a weak currency and its possible secondary impact on inflation as barriers to easing, said Elize Kruger, an independent economist. The rand has lost almost a quarter of its value against the dollar this year.

"There is definitely a difference in the way they look at the current set of circumstances," she said. "It has completely changed the approach. And rightly so, because if we're not going to try and save this economy, what will we have left over?"

These charts show how the committee's stance has evolved:

Less than a month after its biggest cut in more than a decade, the central bank reduced the repurchase rate by another 100 basis points to 4.25% at an unscheduled meeting in April, and yet again by 50bps on Thursday. That's the lowest since the rate was introduced in 1998 and marked the first time since the global financial crisis that the MPC moved lower at four consecutive meetings. All but one of the 20 economists in a Bloomberg survey expected the cut on Thursday.

While the MPC has a track record of being cautious when easing and has repeatedly said that monetary policy alone can't help an economy that slumped into a recession even before the virus was detected in South Africa, all five members of the panel voted to cut the key rate at every one of its meetings this year.

Inflation that is forecast to remain at or below the preferred 4.5% midpoint of the target range on average until 2021 should give the central bank room to respond to the turmoil caused by the virus.

What Bloomberg's Economist Says…
"I don't think there is anything unusual about the SARB's response. I think it is appropriate for a crisis. In 2009, they cut rates by 450bps – 4x100bps plus one 50bps cut. The contraction we are looking at now is even steeper, more than 5% vs 1.5% in 2009. So if anything the response is still relatively tame, especially if you look at the level of the real rate. The low inflation environment, compared to 2009, and also lower inflation expectations, give the SARB more scope to act in our view." – Boingotlo Gasealahwe, Africa Economist

Interest rates