The South African Reserve Bank has announced an additional rate cut on Thursday (21 May), of 50 basis points.
The cut takes the current repo rate to 3.75% per annum, with effect from 22 May 2020. The prime rate moves to 7.25%
Three members of the Monetary Policy Committee (MPC) preferred a cut of 50 basis points and two preferred a cut of 25 basis points.
Reserve Bank governor Lesetja Kganyago said the cut comes amid times of uncertainty around the global coronavirus pandemic, which continues to spread globally, with wide-ranging and deep social and economic effects.
“The crisis has caused extreme volatility in financial asset prices with sharp and deep market sell-offs followed recently by a partial recovery,” he said.
“Investor interest in higher yielding assets has improved somewhat in recent days, but the general environment reflects pronounced levels of risk aversion, in particular for emerging market currencies, equities and bonds.
“Uncertainty about future global economic prospects, trade relationships and supply chains has increased again.”
In South Africa, the bank currently expects GDP in 2020 to contract by 7.0%, compared to the 6.1% contraction forecast in April.
And even as the lockdown is relaxed in coming months, for the year as a whole, investment, exports and imports are expected to decline sharply. Job losses are also expected to be widespread, the governor said.
“Easing of the lockdown will support growth in the near term and some high frequency activity indicators show a pickup in spending from extremely low levels.
“However, getting back to pre-pandemic activity levels will take time. GDP is expected to grow by 3.8% in 2021 and by 2.9% in 2022,” he said.
Despite sustained higher levels of country financing risk, the committee noted that the economic contraction and slow recovery will keep inflation well below the midpoint of the target range for this year.
“Barring inflation risks outlined earlier, inflation is expected to be well contained over the medium-term, remaining close to the midpoint in 2021 and 2022,” Kganyago said.
The decision follows two massive rate cuts during the nationwide Covid-19 lockdown – the first in March, and then in April, of 100 basis points each, and factoring the 25 basis point cut in January, bring the total total reduction of 275 basis points this year so far.
On January 16, the SARB cut the repo rate by 25 bps to 6.25%, after the central bank significantly lowered its inflation forecast.
On March 19, the rate was cut by 100 basis points to 5.25% as the reality of the global economic slump due to the Covid-19 pandemic – and the impact thereof on the South African economy – became clearer.
Following an unscheduled Easter Weekend meeting, the MPC announced an additional 100 basis points cut in the rate on April 14, to just 4.25%.
Kganyago said that the Reserve Bank’s modelling shows there is room for two more cuts of 25 basis points in the remaining two quarters of the year.
You can read the full statement below: