A repo rate cut would be no more than economic Band-Aid
JOHANNESBURG – The country’s cash-strapped consumers would look to the SA Reserve Bank (SARB) for a further easing or maintenance of monetary policy to protect them from the deteriorating state of the economy.
Experts have hinted at the possible easing by the central bank’s Monetary Policy Committee (PMC) in order to provide liquidity into the economy and relief as Covid-19 continue to put more pressure on the consumers.
Investec’s Kamilla Kaplan said there was an expectation that the MPC would keep the repo rate unchanged at 3.5 percent.
Kaplan said though consumer price inflation (CPI) was forecast to increase back towards the mid-point of the target range next year, supporting the argument for an unchanged repo rate.
“CPI inflation is expected to rise on the effects of a higher fuel price and substantial electricity price increases. However, the SARB previously indicated that it is leaning towards further rate cuts.”
Sarb has already lowered interest rates by 300 basis points to 3.5 percent this year, taking cuts to the lowest in nearly 50 years in a bid to relieve struggling consumers and to shore up the economy.
In the past few months, inflation has fallen within the bank’s target range of between 3 percent and 6 percent while household final consumption expenditure decreased by 49.8 percent in the second quarter.
This week the economy took a deeper dive into recession in the second quarter, as the gross domestic product (GDP) contracted by an annualised 51 percent after Covid-19 lockdown restrictions disrupted activity.
Kaplan said the central bank may as well decide to cut the rates as the economy was more constrained than before the Covid-19 impact.
“In view of the worse than expected GDP outcome for the second quarter, and the threat to a subsequent recovery from the electricity supply disruptions, a further reduction in the policy rate cannot be precluded.”
In July, SARB governor Lesetja Kganyago said the implied path of policy rates over the forecast period indicated one rate cut of 25 basis points in the fourth quarter.
Kganyago has regularly pointed to interest rates as being a blunt instrument in the war on structural economic constraints.
Cannon Asset Managers’ Dr Adrian Saville said there was a “50-50” call on a rate cut given that CPI had started to lift while recovery was under way.
“Against this backdrop, while there is a strong temptation to make an ‘insurance call’ of a 25 basis points cut in the repo rate, the balance of probability – even if small – points to the repo rate staying on hold for now.
“Even then, if the repo rate is cut next week, it goes no way in squaring up to urgently needed structural reforms and is no more than an economic Band-Aid.”