'Unanimous' decision to cut rates by 1 percentage point as coronavirus threatens global recession

The South African Reserve Bank has slashed the interest rate by one percentage point, bringing the country's prime lending rate to 8.75% from 20 March to stimulate the economy as the coronavirus is threatening to plunge the country deeper into recession.

"The decision was unanimous," said the Bank's governor, Lesetja Kganyago.

The governor said the MPC’s quarterly projection model indicated three repo rate cuts of 25 basis points in the second, third and fourth quarter of 2020.

But Kganyago said this won’t mean additional rate cuts. He said the bank considered all those projections to arrive at today’s rate cut of one percentage point.

"Monetary policy can ease financial conditions and improve the resilience of households and firms for the short-term, " added Kganyago, before warning that monetary policy alone cannot keep the economy out of trouble.

Kganyago said while South Africa's risks have increased since the country plunged into a technical recession in fourth quarter of 2019, the central bank felt there was enough room to follow on the footstep of other economies who have used monetary policy to help cope with the impact of coronavirus on economic activity.

"The significantly lower forecast for headline inflation has created a space for monetary policy to respond to rapid deterioration in economic conditions," said Kganyago.

The governor said the central bank expects headline consumer inflation to average 3.8% in 2020, which is at the low end of SARB’s target range of 3% to 6%. Core inflation is expected to average 3.9%. The bank now expects the economy to contract by 0.2% in 2020 because Covid-19 will likely cause weaker demand for exports and for goods and services in the country, while businesses will battle with interruptions to their supply chains, said Kganyago.

"Apart from the Covid-19 global pandemic, electricity supply constraints and other sources of uncertainty are expected to keep the economic activity muted," added Kganyago.

This is the second time this year that the South African Reserve Bank has cut interest rates to try and prop up the increasingly flagging economy. In January, it lowered the country's repo rate by 25 basis points to 6.25%, bringing the prime lending rate to 9.75%.

Global interventions

The slashing of the interest rate was widely expected as other central banks around the world have done so as part of their stimulus packages to deal with the impact of the pandemic on economic growth, especially since more economists say global recession is now sure to occur in 2020.

In the US, the Federal Reserve slashed its benchmark interest rate by a full percentage point to near zero on Sunday. Elsewhere in the world, such as Japan, where the central bank didn't use interest rates to provide stimulus to the economy in the wake of coronavirus, it said it would double purchases of company stocks and ETFs.

In anticipation of what the SARB would do and whether it would follow in the footsteps of these economies, Bloomberg surveyed 21 economists  and 11 of them predicted a 50 basis-point reduction to 5.75%, while the balance expected the rate to be lowered by 25 basis points.

But other commentators, including Efficient Group chief economist Dawie Roodt - who predicted an up to 6% contraction in South Africa's GDP in the second quarter - said even a full 1% reduction is not out of question under the current circumstances. 

The country's largest labour federation, the Congress of South African Trade Unions, also challenged the SARB to "show bold and decisive leadership" by slashing the interest rate by at least 1%.

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