The South African Reserve Bank (Sarb) cut its repo rate by another 50 basis points to 3.75% on Thursday, taking the prime commercial lending rate to 7.25%.
Sarb governor Lesetja Kganyago announced the decision following the bank’s three-day Monetary Policy Committee (MPC) meeting in Pretoria.
This takes the bank’s total repo rate cuts this year to 275 basis points or 2.75%, as it slashes rates in the face of Covid-19 economic fallout. The latest MPC meeting follows the bank calling an emergency MPC in April, where it announced a surprise 100-basis point cut.
During his MPC speech on Thursday, Kganyago noted that since the April MPC meeting, the Covid-19 pandemic continued to spread globally, with wide-ranging and deep social and economic effects.
“Economic contractions are expected to be deepest in the second quarter of 2020, with gradual recoveries in the third and fourth quarters of the year,” he said.
“The Covid-19 outbreak has major health, social and economic impacts, presenting challenges in forecasting domestic economic activity. The compilation of accurate economic statistics will also remain severely challenged,” he added
Kganyago said the bank now expects South Africa’s GDP in 2020 to contract by 7%, compared with the 6.1% contraction forecast in April.
“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,” he noted, however, he did not give a specific forecast on anticipated job cuts.
“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,” Kganyago added.
Monetary policy however 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. #MPCStatement #MayMPC pic.twitter.com/9mGWMiDkUQ
— SA Reserve Bank (@SAReserveBank) May 21, 2020
On the inflation outlook, he said Sarb’s headline consumer price inflation forecast averages 3.4% for 2020 and 4.4% in 2021 and 2022. The forecast for core inflation is lower at 3.5% in 2020, 3.8% in 2021, and 4.1% in 2022.
“The overall risks to the inflation outlook at this time appear to be to the downside…. Global producer price and food inflation appear to have bottomed out. Oil prices remain low but have recovered somewhat. Local food price inflation is also expected to remain contained,” he pointed out.
“Risks to inflation from currency depreciation are expected to stay muted while pass-through remains slow. However, electricity and other administered prices remain a concern. Upside risks to inflation could also emerge from heightened fiscal risks and sharp reductions in the supply of goods and services,” Kganyago said.
He added that SA’s economic contraction and slow recovery will keep inflation well below the midpoint of the bank’s target range for this year.
He said the bank’s monetary policy quarterly projection model indicates two further repo rate cuts of 25 basis points in the next two quarters of 2020.