Economists divided over rate decision this week

 ·20 Jul 2020

Economists expect the South African Reserve Bank (SARB) to cut rates this week by at least 25 basis points – which would put rates at 3.5%, the lowest point in decades.

The SARB’s Monetary Policy Committee is meeting this week (21 – 23 July 2020), with an announcement on rates expected on Thursday.

The ratings decision comes at a time when consumer inflation is at a 15-year low at 2.1%, while GDP declines for 2020 are forecast to be worse than the SARB’s expected -7%.

“We expect the MPC to reduce the repo rate by a further 25 basis points (bps) after a cumulative 275bps of rate declines since the start of the year,” said economists from the Bureau of Economic Research (BER).

“Even though the forward-looking real policy interest was already negative after May’s 50bps-cut, the bank might be willing to tolerate an even lower policy rate in order to provide some further support to ailing aggregate demand,” the BER said.

Relative to the SARB’s inflation outlook presented in May, recent outcomes have been better than expected, the group said. In conjunction with a stronger rand exchange rate compared to the levels seen prior to the May meeting, this also argues in favour of a further cut.

A panel of 11 experts questioned by Finder, are divided. Chief economist at Investec Annabel Bishop and Independent economist at Carpe Diem Research Services Elize Kruger both forecast a rate hold, with each noting that the rate is either at or close to the bottom of the cycle.

Interest rates are at historical lows, and the MPC has cut rates very substantially this year already. Further cuts, if they occur, are likely to wait until there is a compelling reason to drive them,” said Bishop.

Professor at the University of Johannesburg, Ilse Botha, is expecting a rate cut of 25bps given “the current economic climate, debt levels are rising and a rate cut will be beneficial.”

“Inflation is also currently within target and expansionary monetary policy makes sense, although a rate cut will not necessarily result in higher spending currently,” she said.

Economist at BNP Paribas Jeff Schultz expects the most aggressive rate cut of 50bps on the back of materializing downside risks to both its inflation and growth forecasts.

“Our expectation for the SARB to miss it’s inflation target over the following 12m, with CPI likely to average below the floor of its 3-6% target range means that the bank probably has a bit more room to help support the economy, indebted consumers and struggling companies,” he said.

When asked whether or not the Bank should pursue a full-scale quantitative easing program, 82% said the current programme of bond-purchasing is sufficient.

Schultz  said a QE programme is a dangerous path to go down and could risk the bank’s extremely well-entrenched credibility as an inflation target by markets.

Chief executive officer and chief economist at Antswisa Transaction Advisory Services, Miyelani Mkhabela, said that the SARB is not doing enough.

“The SARB must purchase National Treasury bonds and I believe nationalisation of the Reserve Bank will add more value to the South African developmental state approach and expand the economy to be more inclusive to the previously disadvantaged and have at least two black banks to operate nationally in both retail and Corporate Investment Banking,” he said.

Before the MPC delivers its latest rate verdict, Stats SA will publish both the April and May numbers for retail sales (Wednesday) and wholesale trade sales (Thursday).

“This will provide a further indication of just how steep the overall GDP decline was in the second quarter,” the BER said.

According to economists at Bank of America, the economic decline for 2020 is predicted as high as 10.3%. This leaves the SARB with a wide range of moves: consensus is for a 25bp cut but estimates range from a hold to 50bp move.

“Our models still indicate room for 100bps of cuts this year, versus market pricing for 50bps,” it said. Its baseline view is that there will be a 50bps cut, with a 25bps cut coming with a more “measured view” on risks.

BoA pointed out that the last rate cut was a close call, with the vote split 3-2 in favour of the 50bps cut, and thus there is a chance that the SARB could take a more cautious stance, gauging the pace of the recovery and increased fiscal concerns.

“The markets currently price around 25bp for the SARB meeting. More generally, the market-implied easing cycle prices around 50bp in the next three months followed by a gradual unwind of cuts,” the bank said.

A recent Reuters poll of economists found that most predict a 25bps cut.

Thirteen of 28 economists expected a 25 basis point cut and two expected 50 basis points to 3.25%. Thirteen said the bank would leave rates unchanged.

Median forecasts from the poll suggest rates are expected to be left at 3.5% for the remaining September and November meetings this year. The SARB may then raise the repo rate to 3.75% next year.

Read: What South Africa’s lowest consumer inflation in 15 years means for interest rates

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