The South African Reserve Bank on Thursday (19 March) took the decision to cut the repo rate by 100 basis points.
This, governor Lesetja Kganyago said, takes the repo rate to 5.25% per annum, with effect from 20 March 2020. The decision was unanimous, he said.
The cut reduces the mortgage rate to 8.75%.
The governor said that low inflation has created space for monetary policy to respond to deteriorating economic conditions. The bank’s headline consumer price inflation forecast averages 3.8% for 2020, 4.6% for 2021, and 4. 4% in 2022.
The forecast for core inflation is lower at 3.9% in 2020, 4.3% in 2021, and 4.4% in 2022.
The domestic economic outlook remains fragile, Kganyago said. “At this point, Covid-19 is likely to result in weaker demand for exports and domestic goods and services, but its impact on the economy could be partly offset by lower oil prices.
“We also expect disruptions to supply chains and to normal business operations.”
He said that the bank now expects the economy to contract by 0.2% in 2020. GDP growth is expected to rise to 1.0% in 2021 and to 1.6% in 2022.
“Apart from the Covid-19 global pandemic, electricity supply constraints and other sources of uncertainty are expected to keep economic activity muted. Public sector investment has declined and job creation has slowed.
“Business and household confidence have weakened further,” Kganyago said.
Government and household consumption, and private investment, however, continue to grow, albeit modestly.
“While export growth is expected to decelerate further in the near term, prices remain high for some export commodities, and could be supported by an early resumption in China’s economic activity.
“The technical recession of the latter half of 2019 contributed to a lower economic growth forecast. In addition, Covid-19 and existing constraints such as load shedding, imply significant downside risk to the forecast,” the governor said.
He said that the implied path of policy rates over the forecast period generated by the Quarterly Projection Model indicated three repo rate cuts of 25 basis points each in the second and fourth quarter of 2020, as well as in the third quarter of 2021.
“Monetary policy can ease financial conditions and improve the resilience of households and firms to the short-term economic implications of Covid-19. Our decision and its magnitude seeks to do this in the near term,” Kganyago said.
The governor warned that monetary policy however, cannot on its own improve the potential growth rate of the economy or reduce fiscal risks.
“Current economic conditions underscore the importance of implementing prudent macroeconomic policies and structural reforms that lower costs generally,and increase investment opportunities, potential growth and job creation,” he said.