Summary: On April 14, the South African Reserve Bank (SARB) Monetary Policy Committee (MPC) unexpectedly announced another 100 basis points cut in interest rates following an identical move in March. The central bank said it now expects the South African economy to contract by 6.1% in 2020. A downward revision in its inflation forecast for 2020 — close to the bottom of the 3%–6% target range — combined with this recession forecast enabled the MPC to ease monetary policy further. In addition, the SARB indicated room for another 125 basis points cut in lending rates over the next 12 months.
MPC sees 6.1% contraction in South African economy this year
The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) announced on Tuesday, 14 April it has reduced interest rates by another 100 basis points, following an identical move on 19 March. The announcement was unexpected: The central bank indicated last month that it did not see the need to have policy meetings more often than the normally scheduled bi-monthly MPC summits.
In making the announcement this week, the SARB indicated that the scheduled meeting in May had been brought forward to the Easter Weekend. Tuesday’s announcement reduces the repurchase (repo) rate to 4.25% and the prime lending rate to 7.75% — the lowest levels since the early 1970s.
The SARB commented that the extension of the national lockdown (until April 30) will result in a greater economic contraction in the short term as businesses stay shut for longer and households spend less. The central bank now expects the South African economy to contract by 6.1% in 2020 — a sharp deterioration from the 0.2% decline forecast just three weeks ago. The MPC added that a faster recovery in the world economy (from the currently expected global recession) would have positive growth spillovers for South Africa.
On the inflation front, the SARB commented that the much weaker economic growth outlook coupled with low oil prices have resulted in a downward revision in inflation forecasts. (The central bank expects Brent oil to average $42 per barrel this year.)
Consumer price inflation is forecast to average 3.6% in 2020; this is close to the bottom end of the 3–6% target range. Combined with the weak economic outlook, this low inflation outlook makes room for significant monetary stimulus to the broader economy. The MPC commented that the overall risks to the inflation outlook appear to be to the downside at present.
Looking ahead, the MPC statement indicated that the central bank’s internal modelling suggests room for a further five interest rates cuts of 25 basis points each over the coming 12 months. However, given the speed at which the local and global environment is changing at present, it is not impossible for the SARB to make another big (i.e. larger than 25 basis point) rate cut in the near future. Of course, as policymakers always warn, the outlook and current rate cut suggestions are highly dependent on economic data. The exchange rate, for example, is one of the factors that could pressure the cost of imported inflation in coming quarters.
As always, the MPC warned that, while monetary policy can ease financial conditions and improve the resilience of households and firms, it cannot on its own improve the potential growth rate of the economy. The SARB reiterated that potential growth can only be improved by “implementing prudent macroeconomic policies and structural reforms that lower costs generally, and increase investment opportunities, potential growth and job creation.” In late March, Finance Minister Tito Mboweni announced the formation of a unit within the Ministry of Finance that will focus specifically on structural reforms.
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