Interest rate cut by 1% but SA isn’t out of the woods

Reserve Bank governor, Lesetja Kganyago.
Reserve Bank governor, Lesetja Kganyago.

The Reserve Bank’s monetary policy committee, in a unanimous decision, on Thursday cut the repo rate – the rate at which it lends to commercial banks – by 100 basis points.

This bring the rate to 5.5% as the global economy continues to be infected by the outbreak of the Covid-19 coronavirus and this weakness bleeds into South Africa’s already fragile economy.

The interest rate cut should come as a welcome relief to borrowers and consumers, as commercial banks are expected to follow suit and cut lending rates.

Read How Covid-19 will dominate African interest-rate decisions

Painting a stark picture of the downgrade in global growth to 1.1% and projecting a contraction of the local economy by 0.2% for this year, Reserve Bank Governor Lesetja Kganyago said, however, that the country’s inflationary outlook remains within the 3% to 6% target for the next three to five years.

The governor said that there are fiscal measures to mitigate effects of the virus. Global prices for commodities have tanked, particularly for oil and copper, with the outlook to average $40 (about R690) a barrel for Brent Crude this year and $44 next year, which is below the average for previous cycles.

Despite the lower prices, the domestic outlook remains fragile, and the virus could lead to weaker export demand that may be partially offset by lower oil prices.

GDP growth for next year is expected to come in at 1% and rise slightly to 1.2% in 2022.

The interest rate cut should come as a welcome relief to borrowers and consumers, as commercial banks are expected to follow suit and cut lending rates.

However, persisting electricity supply constraints and other sources of volatility will continue to keep economic activity muted. Adding to this is the continued slow investment by the public sector.

Financial volatility and perceived risk has seen a 17.2% decline in the value of the rand. The implied starting point for this meeting was R15.30/$ against R14.90/$ at the previous meeting, but the forecast sees the currency strengthening.

On an inflationary position, headline Consumer Price Inflation is seen coming in at 3.8% for this year, 4.6% for next year and 4.4% in 2022. Core inflation will track this at 3.9%, 4.3% and 4.4% for the next three years.

But South Africa is not out of the woods as heightened risk sentiment in international markets has amplified domestic risks and pushed sovereign bonds yields sharply higher.

Despite the general rise in risk, significantly lower forecast in headline inflation has created space for monetary policy to respond to rapid deterioration in economic conditions which has led to the 1% rate cut decision.

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