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SA’s MPC curbs easing expectations after cutting again

The South African Reserve Bank (Sarb) curbed expectations for further aggressive easing after cutting its benchmark interest rate for the fourth time in as many months in a bid to support an economy forecast to slump deeper into recession.

The monetary policy committee (MPC) voted to lower the repurchase rate to 3.75% from 4.25%, Sarb Governor Lesetja Kganyago said on Thursday. That’s the lowest since the rate was introduced in 1998. All but one of 20 economists in a Bloomberg survey said the Sarb would reduce the benchmark interest rate, with predictions for the cut ranging from 25 to 100 basis points.

Of the five panel members, three favoured a 50 basis-point cut and two preferred 25 basis points of easing. In the previous three cuts, where the MPC moved by 50 basis points once, and then twice by 100 basis points, members were unanimous on the size of the easing. The vote indicates “the appetite to cut rates is easing off,” said Kevin Lings, chief economist at Stanlib Asset Management in Johannesburg.

“My view is they will watch and see how things develop in terms of growth and inflation.”

Lockdown easing

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 lockdown restrictions that started on March 27. Output could increase by 3.8% next year and 2.9% in 2022.

“Easing of the lockdown will support growth in the near term and some high-frequency activity indicators show a pickup in spending from extremely low levels,” Kganyago said. “However, getting back to pre-pandemic activity levels will take time.”

The government started relaxing some lockdown regulations from May 1 and President Cyril Ramaphosa said last week most of the country should be at Level 3 restrictions by the end of the month. Yet at a meeting with opposition parties on Wednesday it was suggested that metropolitan areas, where the bulk of infections have been detected, could remain at the so-called Level 4. That would continue to curb business in the economic hubs.

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. The central bank’s forecasts show the rate dropping below the 3% lower band of the range this quarter and in the next, and that’s entirely driven by the drop in gasoline costs after the plunge in oil prices, according to MPC member Chris Loewald, who also heads the central bank’s economic research.

While the MPC projects inflation will pick up later this year and peak at an average of 5% in the second quarter of 2021, Johann Els, chief economist at Old Mutual Investment Group, said price growth could drop to 2% soon.

Deflation risk

“I’m much more worried about deflation than inflation,” Els said by phone. “They should have cut more. I view this as a missed opportunity and the possibility of policy error is rising.”

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.

“They seem happy with just slightly negative real rates in the short to medium run, but not too much, which I think shows whilst they can cut from here there isn’t as much room as maybe the market thought there might be,” said Peter Attard Montalto, head of capital markets research at Intellidex.

What Bloomberg’s economist says

“Although disappointing, the Sarb rate cut is consistent with its outlook of inflation and GDP growth. Even though the risks to both are skewed to the downside, in our view, the vote split, the size of the cuts debated and Kganyago’s return to the sentiment that monetary policy cannot on its own improve growth suggests that aggressive rate cuts are now a thing of the past. Because of the central bank’s uncertainty about the channels through which monetary policy is affecting growth, if at all, future rate cuts will likely remain small.”