The South African Reserve Bank’s Monetary Policy Committee has voted to cut the country’s rates by a further 25 basis points.
This takes the total cut in 2020 to 300 points, lowering the repo rate to 3.5% and the prime lending rate to 10%.
The latest cut reduces prime and the base home loan rate to a further historic low of 7.0%.
The cut is in line with expectations from economists, though many believed there was room for a deeper cut.
However, in his announcement, Reserve Bank governor Lesetja Kganago warned that monetary policy alone cannot spur economic growth, and that wide economic reforms are needed.
“Monetary policy cannot on its own improve the potential growth rate of the economy or reduce fiscal risks. These should be addressed by implementing prudent macroeconomic policies and structural reforms that lower costs generally, and increase investment opportunities, potential growth and job creation,” he said.
“Such steps will enhance the effectiveness of monetary policy and its transmission to the broader economy.”
Monetary policy can ease financial conditions and improve the resilience of households and firms to the economic implications of Covid-19. In addition to continued easing of interest rates, the SARB has relaxed regulatory requirements on banks and has taken important steps to ensure adequate liquidity in domestic markets.
“These actions are intended to free up more capital for lending by financial institutions to households and firms,” he said.
The steep cuts made by the Reserve Bank this year come on the backdrop of the global Covid-19 pandemic and subsequent lockdown of the economy, which has left South Africa’s already weak economy battered.
The governor said the crisis has caused extreme volatility in financial asset prices with sharp and deep market sell-offs followed by a partial recovery.
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 rise further, he added.
In terms of growth prospects, the SARB’s second quarter estimate for output has been revised lower.
“The Bank currently expects GDP in 2020 to contract by 7.3%, compared to the 7.0% contraction forecast in May. GDP is expected to grow by 3.7% in 2021 and by 2.8% in 2022,” it said.
South Africa’s terms of trade and commodity export prices remain high. The Brent crude oil price is expected to average about $40 per barrel in 2020, rising to $45 per barrel in 2021 and $50 per barrel in 2022.
Financing conditions for emerging markets remain uncertain, contributing to currency weakness. The rand has depreciated by 15.2% against the dollar since January and appreciated by 8.8% since the May meeting of the MPC.
Three members preferred a cut of 25 basis points, while two preferred to keep rates on hold, as was the case in the prior meeting.
The implied path of policy rates over the forecast period generated by the Quarterly Projection Model indicates one repo rate cut of 25 basis points in the fourth quarter of 2020, remaining unchanged in the first quarter of 2021.
“Global economic and financial conditions are expected to remain volatile for the foreseeable future. In this highly uncertain environment, future decisions will continue to be data dependent and sensitive to the balance of risks to the outlook,” Kganyago said.
“The MPC will seek to look through temporary price shocks and focus on second round effects.”
The full statement is below: