Reserve Bank announces surprise rate cut of another 100 basis points

The South African Reserve Bank’s Monetary Policy Committee has cut the country’s benchmark interest rate by another 100 basis points (one percentage point), taking the repo rate to 4.25% per annum.

The MPC meeting was initially scheduled to take place in May 2020, but was brought forward to Tuesday, the central bank said.

This move follows a 100 basis point cut on 19 March 2020, after the global coronavirus epidemic was declared a state of disaster in the country.

At the time, Reserve Bank governor Lesetja Kganyago said that low inflation has created space for monetary policy to respond to deteriorating economic conditions.

The move is likely to be welcomed by consumers and businesses who are facing immense financial pressure due to the ongoing lockdown.

Industries such as the property sector, are also likely to benefit as it will make it easier for South Africans to qualify for and pay off loans.

In a briefing regarding the cut, Reserve Bank governor Lesetja Kganyago said it comes against the backdrop of global uncertainty around the coronavirus pandemic, and weak local economic fundamentals.

It was a unanimous decision, he said.

The global Covid-19 pandemic has introduced unprecedented levels of uncertainty to global markets, which have impacted every sector.

“The uncertainties of the crisis have led to extremely high volatility in financial asset prices, with sharp and deep market sell-offs followed by a partial recovery,” the governor said.

“At this stage, the sustainability of that recovery remains uncertain, and global markets remain in risk-off mode. This has implications for emerging markets and South Africa in particular, as investor appetite for rand-denominated equities and bonds is expected to remain weak.”

In South Africa this is being felt across both the supply and demand side of industries, with businesses remaining shut during the now-35 day lockdown, and consumers staying home, spending less.

“The Covid-19 outbreak will have a major health and social impact, and forecasting domestic economic activity presents unprecedented uncertainty,” he said.

Reflecting this, the Reserve Bank now expects GDP in 2020 to contract by 6.1%, rising to growth of 2.1% in 2021 and 2.7% in 2022.

Job losses as a result of the lockdown are expected to continue, hitting the informal sector particularly hard, Kganyago said.

The downgrade by Moody’s also factored in, though the governor noted that the lockdown and prolonged recovery are having a bigger impact – though inflation remains contained.

He added that the forecasting model shows room for five 25 basis-point cuts ahead, extending to the first quarter of 2021.

The full statement can e read below:

May 2020 MPC Statement by BusinessTech on Scribd

Read: SA Reserve Bank cuts repo rate by 100 basis points

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Reserve Bank announces surprise rate cut of another 100 basis points