Governor of the SA Reserve Bank Lesetja Kganyago. File Photo: IOL
Governor of the SA Reserve Bank Lesetja Kganyago. File Photo: IOL

South Africa’s fifth rate cut may signal bottom of cycle near

By Bloomberg Time of article published Jul 23, 2020

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By Prinesha Naidoo and Mike Cohen

The South African Reserve Bank cut its key interest rate for a fifth time in as many meetings and tempered expectations for further aggressive easing, even as it forecast the economy will contract even more this year and inflation will stay muted.

The monetary policy committee voted to lower the repurchase rate to 3.5% from 3.75%, Governor Lesetja Kganyago said Thursday.

Of the five members on the panel, three favored a 25 basis-point cut and two wanted to hold. The key rate is at the lowest level since it was introduced in 1998.

The central bank’s quarterly projection model now forecasts a repurchase rate of 3.48% by the end of this year and 3.87% by the end of 2021 and the panel frontloaded the 25 basis-point the model showed for the fourth quarter, Kganyago said. That’s even as inflation eased to below the 3% bottom end of the central bank’s target range for the first time in 15 years in May and risks to the price-growth outlook are balanced.

“We are at or near the end” of the rate-cutting cycle, said Nazmeera Moola, head of South African investments at asset manager Ninety One Ltd. in Cape Town. “I think the central bank is taking the view that they want to lower interest rates to a level where they can keep them there for as long as possible. They don’t want to go up and down.”

Muted Impact

The MPC has now lowered the key rate by 300 basis points this year. However, a lockdown to curb the spread of the coronavirus that started on March 27 has muted the impact of these cuts on economic activity and the easing has not yet filtered through, Kganyago said.

The central bank sees the economy contracting by 7.3% in 2020, even more than its previous estimate of 7% and reduced its economic growth forecasts for the next two years, to 3.7% for 2020 and 2.8% in 2022. It kept its inflation forecast for this year unchanged at 3.4% and said the rate of price growth is expected to remain close to 4.5% until at least the end of 2022.

Inflation is under control now because the economy is stuck in its longest downward cycle since records began and will start moving higher gradually from here, said Nicky Weimar, chief economist at Nedbank Ltd. in Johannesburg.

Critics of the bank say it should do more to boost the economy and help reduce the country’s 30.1% unemployment rate. In addition to the rate cuts, it has relaxed accounting and capital rules to promote lending by commercial banks, and by more than tripling its holdings of South African government debt has helped to bring down borrowing costs in the domestic market.

“We are very near the trough of interest rates,” Weimar said. “If there is another 25 basis points in it, then that will be the bottom.”

What Bloomberg’s Economist Says

“While the SARB’s model suggests an end to the current easing cycle, we still expect more cuts this year -- but at the slower pace than seen today, as incoming economic data continues to lag the current reality.” -Boingotlo Gasealahwe, Africa economist.

BLOOMBERG

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