Another rate cut may be on the cards as SARB ponders recession
The SARB’s Monetary Policy Committee (MPC) will on Thursday announce its decision on the repo rate after lowering interest rates by a collective 275 basis points since the coronavirus pandemic began.
Governor Lesetja Kganyago last month said that financial markets anticipated the repo rate to stay above 3 percent for the next few years.
Kganyago said the bank’s projections also showed much the same.
PricewaterhouseCoopers (PwC) chief economist Lullu Krugel said the SARB’s forecast of a 7percent recession this year was too conservative.
Krugel said a revision to this number next week could see the Reserve Bank increase its forward guidance for more or deeper rate cuts in the short term.
She said that PwC, however, did not expect any change in the repo rate this month and that she believed the Reserve Bank would adopt a wait-and-see approach.
“Due to the adverse impact of the lockdown on the normal flow of the economy, the influence of rate cuts has been delayed,” Krugel said.
“As such, we believe the SARB will take a wait-and-see approach in July and keep the repo rate on hold at 3.75percent.
“It is more likely that further rate cuts will resume in September, once more is known about the state of the economy during the second quarter.”
In May, the MPC predicted room for two further repo rate cuts of 25 basis points each during the second half of this year.
With the annual consumer price inflation declining to 2.1percent from 3percent in April, SARB saw at least a 3.25percent level as the bottom of the monetary policy easing cycle.
The bank and the National Treasury expect the economy to contract by 7.2percent this year, the largest contraction in nearly 90 years, due to the impact of Covid-19.
Investec chief economist Annabel Bishop said the uncertainty of a rate cut could bear some pressure for renewed rand depreciation.
Bishop said a rate cut would assist with debt-servicing costs, which were forecast to crowd out spending on education and other policy priorities. South Africa will spend as much on servicing debt as it does on health in this financial year.
“Should the SARB choose to deliver another interest rate cut this week, potentially 25 basis points, it is likely to be to lower debt-servicing costs, and so assist economic activity, instead of due specifically to May 2020’s inflation figure,” Bishop said.
“The rand could weaken somewhat on a rate cut, but is likely to still see some support thereafter on global yield seeking.”