The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) meets this week, with economists and analysts expecting another rate cut to be announced on Thursday.
However, some have cautioned that the cut won’t be as drastic as the last two 100 basis point cuts announced in March and April – while it will come with unwelcome news around economic growth.
According to Lullu Krugel, chief economist for PwC Strategy& Africa and Dr Christie Viljoen, PwC Strategy& economist, the expectation is that the MPC will announce, at most, a 50 point cut.
“The MPC said in mid-April that its internal modelling suggests room for a further five interest rates cuts of 25 basis points each over the coming 12 months,” PwC said.
“However, given the speed at which the local and global environment is changing at present, it is not impossible for the MPC to make another big (i.e. larger than 25 basis point) rate cut in the near future. A lot has changed (read: deteriorated) in the South African economy since the previous MPC statement a month ago.”
The Bureau for Economic Research (BER) has also pencilled in a cut of 50 basis points.
However, the combination of an even more benign inflation and worse GDP outlook than when the MPC last met in mid-April suggests the risk is for a more aggressive reduction, it said.
A survey conducted by financial comparison group Finder, polled 10 economists on their MPC expectations, with eight forecasting a rate cut.
Four panellists, including Investec’s chief economist Annabel Bishop, expect the rate to fall by 25 basis points, while four other panellists predict rate cuts of 50-100 basis points. The panel average was 50 basis points.
Bishop said the MPC may choose to cut interest rates again to assist debt servicing.
“It has however already put considerable measures in place to provide monetary support, and markets have since stabilised, the yield curve has lowered and steepened and the dislocation that was occurring in the bond market has resolved,” she said.
Associate professor at the University of Cape Town Graduate School of Business, Sean Gossel – who also forecast a 25bp decrease – thinks the MPC should cut the rate by 50.
“The SARB has to balance setting interest rates that will attract foreign capital but at the same time must ease interest rates to stimulate domestic economic activity. Historically, the SARB has favoured a high interest rate differential to keep the economy moving using international capital flows but these are not normal times,” he said.
Wits Business School Interim Head at the University of Witwatersrand, Jannie Rossouw and chief economist at Alexander Forbes, Isaah Mhlanga, are the only two panellists who think the MPC will, and should hold the rate, arguing previous rate cuts and liquidity has not yet filtered through the economy.
“The SA Reserve Bank has recently announced sharp declines in the repo rate and should first assess the full impact of these decisions,” Rossouw said.
Bad news on the economy
According to PwC, the deterioration of the economy since the April meeting will definitely factor into the SARB’s decisions. At the time of its last meeting, it was conceivable that the lockdown would come to an end within the states time frames.
However, since then, the lockdown has been extended to the current ‘risk-based’ format, keeping large parts of the economy closed.
PwC’s modelling indicates the South African economy could contract by as much as 13% this year, based on the current risk-adjusted approach communicated by government – and it expects the SARB to deliver new forecasts reflecting this deteriorated position.
Finder’s panellists expect the South Africa economy to contract anywhere from 4.8% to 12% in 2020, with an average forecast contraction of 7.6%.
However there is some positive news – 78% of panellists think the economy will see some recovery in Q3, although many did note that this is dependent on the success of eased lockdown restrictions.
“This is on the assumption that the lockdown will be lowered to something between level 2-3 by Q3 which should open up approximately 70% of the economy compared with Q2 where roughly 80% of the economy was shut down,” said BNP Paribas economist, Jeff Schultz.
However neither professor of Economics at the University of Western Cape, Matthew Kofi Ocran or Gossel are as optimistic, with neither forecasting a recovery in Q3. Ocran went as far as to rebuff the idea of a V-shaped recovery.
“The Covid-19 shock came through at a time when the economy was already weak. And with the unreasonable lockdown regime that has shut down almost all economic activity including those that pose a very little public health risk, we can only expect a U-shaped recovery,” he said.
Gossel noted that the very structure of South Africa’s economy is weak, delaying any recovery.
“The global and domestic Covid economic shocks are both supply and demand shocks and will take a long time to ripple through the economy. In South Africa, these effects will be long-lasting because of the weak structure of our economy – overly corporatist, still overly informal, and missing SMMEs.
“Corporates are reliant on the global recovery, which is still a way off, informal economy is reliant on survivalist income, and SMMEs are failing due to years of onerous regulations and a lack of capital all of these problems have been heightened now,” Gossel said.