SLASH: Interest rate is lowered
SLASH: Interest rate is lowered

SARB slashes country's growth forecast again as pandemic weighs on economy

By Siphelele Dludla Time of article published May 22, 2020

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JOHANNESBURG - The SA Reserve Bank (SARB) yesterday slashed the country’s growth forecast further to -7percent this year from the -6.1percent forecast last month.

Reserve Bank governor Lesetja Kganyago said the Covid-19 pandemic would weigh on the country’s economic prospects for a while, with the gross domestic product (GDP) contracting deeper than expected.

Kganyago said even the easing of the lockdown regulations imposed in March would not be sustainable in supporting growth in the foreseeable future.

“Even as the lockdown is relaxed in coming months, for the year as a whole, investment, exports and imports are expected to decline sharply,” Kganyago said. “Job losses are also expected to be widespread.”

Kganyago said getting back to pre-pandemic activity levels would take time, with the GDP expected to grow by 3.8percent next year and 2.9percent in 2022.

North West University Business School’s Professor Raymond Parsons said the economy might contract even further than the SARB forecast as businesses were facing collapse.

“This forecast may still be too optimistic, and GDP growth may be as low as -10 to -12percent, with widespread business failures and rapidly rising unemployment,” Parsons said.

Yesterday, SARB’s Monetary Policy Committee lowered the lending rate by 50 basis points to 3.75percent in a bid to free up more capital for households impacted by the pandemic.

This is the fourth interest rate cut this year as the SARB tries to relax monetary policy by providing financial relief due to the economic downturn.

SARB also eased regulatory requirements on banks to ensure adequate liquidity in domestic markets and to free up more capital for lending.

Kganyago said monetary policy could ease financial conditions and improve the resilience of households and firms to the economic implications of Covid-19.

“Monetary policy, however, cannot on its own improve the potential growth rate of the economy or reduce fiscal risks,” he said.

“These should be addressed by implementing prudent macroeconomic policies and structural reforms that lower costs generally, and increase investment opportunities, potential growth and job creation.”

Kganyago said the implied path of policy rates over the forecast period indicated two repo rate cuts of 25 basis points in the next two quarters.

Old Mutual economist Johann Els said the SARB missed an opportunity to cut rates by 100 basis points. “In addition to hoping to see a more significant rate cut, the SARB should also have started quantitative easing as in the US by pre-announcing its size and duration,” Els said. The rand reacted positively, strengthening 0.28percent to the dollar to R17.67, 0.54percent to the pound and 0.39 percent to the euro by 5pm.

The JSE All Share Index, however, retreated 2.15percent to 51 022.76 points and the Top40 Index 2.37percent to 42 232.46 points.

FXTM’s Jameel Ahmad said SARB’s had shown that it had scope to continue easing interest rates in light of difficult economic conditions was a positive sign.

BUSINESS REPORT 

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