The South Africa Reserve Bank is expected to cut interest rates by 50 basis points on May 21 to a record low of 3.75% to ease the pain of the country’s recession, as this quarter shows signs of a steep downturn due to limited economic activity, a Reuters poll found.
South Africa’s government has implemented a nationwide lockdown to contain the spread of the coronavirus while the Reserve Bank has been buying secondary market bonds to deal with the economic impact. The Treasury is due to introduce a new budget on June 24 to add more stimulus.
“As the negative impact of the continued lockdown becomes more clearly quantifiable, there is room for a further rate cut of 50 basis points given current inflationary expectations,” said Frank Blackmore, an economist at EF Consult.
Nine of 20 economists surveyed in the past week said the central bank would cut rates by 50 basis points to 3.75% next week. Four expect just a quarter-point trim. Three said the repo rate would be eased by 75 basis points and three expect no change.
Nedbank economists were again the only forecasters to predict rates would be cut by a full percentage point – as happened on April 14 and March 19.
In the 2008/09 recession, the SARB cut rates by a cumulative 700 basis points through 2012 to stimulate the economy.
“We hold on to our call for another 125 basis points in cuts this year, a 75-100 basis point cut likely to be delivered again in the May meeting, with the SARB likely to continue to favour frontloading cuts in anticipation of more substantial economic pressure,” said Jeffrey Schultz, an economist at BNP Paribas.
This quarter is expected to be the deepest contraction in South Africa’s history at 36.2%, far gloomier than last month’s 23.0% prediction.
The latest poll median was for the economy to shrink 6.5% this year, compared with last month’s 4.9% contraction forecast, but it was expected to recover to 2.9% growth next year.
“A GDP contraction of above 10% year-on-year for 2020 is instead now quite possible on a lengthy, severe lockdown … as many corporates not only temporarily cease activity, but do so permanently,” said Annabel Bishop, chief economist at Investec.
Demand is so low in South Africa it is included in a number of emerging-market countries where inflation was predicted to show signs of deflationary trends.
“Strong deflation in fuel prices and collapsing demand are likely to outweigh a weaker rand and its limited pass-through into CPI, averaging a 17-year low of 2.8% in 2020, breaching the lower bound of the 3-6% target range,” Shultz said.
The survey’s median showed inflation was expected to average higher than Shultz’ expectations at 3.5% this year.
Still, Shultz said core CPI – a gauge for long-term trends in inflation – suggested the risk-sensitive priced items slipping into strong disinflation territory, or deflation, should not be underestimated.
South African President Cyril Ramaphosa said on Wednesday he aimed to further ease restrictions imposed to curb the new coronavirus, but places with the most infections likely would remain into June on “alert level 4” of a five-level system.
“54% of businesses surveyed by Statistics SA in the first two weeks of April already said they will cease to exist before mid-July if they cannot generate sufficient turnover,” said Bishop. “Most businesses will have lost incomes needed to pay staff and other costs, resulting in retrenchments rising substantially and firms shutting down permanently.”