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South African Reserve Bank cuts repo rate by 100 basis points
March 20, 2020, 9:03 am

Due to lower inflation forecast and expected recession

The National Treasury building in Pretoria [PREUSS]

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) took the unanimous decision to cut the repo rate by 100 basis points to 5.25 per cent in response due to lower inflation forecast as a result of the collapse in oil prices in March, as well as a forecast recession caused by the global response to the Covid-19 coronavirus outbreak.

A Bloomberg survey had 11 economists expecting a 50 basis points cut with 10 economists looking for a 25 basis points drop. None of the economists forecast a 100 basis point cut. The forward rate market had priced in a 50 basis points reduction.

“The domestic economic outlook remains fragile. At this point, Covid-19 is likely to result in weaker demand for exports and domestic goods and services, but its impact on the economy could be partly offset by lower oil prices. We also expect disruptions to supply chains and to normal business operations,” the MPC said.

The gross domestic product (GDP) growth projections were revised lower to a 0.2 per cent contraction in 2020 compared with the January forecast of a 1.2 per cent expansion. Growth is then expected to return in 2021 with a 1.0 per cent increase compared with the January forecast of a 1.6 per cent gain. Also, inflation forecasts were cut to 3.8 per cent from a January projection of 4.7 per cent in 2020, while there was no change to the 2021 forecast of 4.6%.

“The implied path of policy rates over the forecast period generated by the Quarterly Projection Model (QPM) indicated three repo rate cuts of 25 basis points each in the second and fourth quarter of 2020, as well as in the third quarter of 2021,” the MPC said.

The MPC emphasised that the QPM is a guide to monetary policy and the MPC stood ready to change rates if circumstances change. The next MPC meeting is in May.

Economists and analysts welcomed the cut, but the stock exchange index nevertheless ended weaker.

“The decision by the MPC today to cut the repo rate by 100 basis points is the right one to help mitigate the risks of Covid-19 to the SA economy. The MPC has now followed about 50 central banks around the world that have so far already reduced interest rates and also taken other steps to offset the impact of Covid-19 on their economies. While monetary policy is not a magic wand to eliminate the economic damage being caused by the pandemic, the SARB’s preparedness to take positive steps on this front is welcome,” Professor Raymond Parsons of the North West University’s Business School said.

“We hope it is not too late and that the cut from 6.25 per cent to 5.25 per cent will arrest the downward economic spiral we find ourselves in. The country is already in a recession and the disruption due to the coronavirus will leave nothing and no-one unscathed. This cut will make borrowing more attractive for individuals and businesses alike, encourage consumer spending and hopefully set us on the track of economic recovery,” Stanford Mazhindu, the spokesperson of the trade union UASA said.

Helmo Preuss in Makhanda, South Africa for The BRICS Post

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