The South African Reserve Bank (Sarb) will cut the repo rate later today (Thursday) when its Monetary Policy Committee (MPC) meeting in Pretoria concludes.
But, the crucial question is whether it will be slashed by 100 basis points or more to give the country’s recession-hit economy and South Africans a significant enough tonic in the face of the financial fallout of the global Covid-19 pandemic.
The Sarb has been hawkish on interest rates for some time and has only cut the repo rate by 0.25% or 25 basis points twice over the last year – in July 2019 and at the MPC’s last meeting in January this year. In fact, the last time the MPC cut rates at consecutive meetings, according to Bloomberg, was back in 2011.
Even before the Covid-19 outbreak, the bank’s conservative monetary policy position has drawn criticism, not just from a few politicians, but several business leaders, academics and even economists.
Although recent surveys of economists suggest consensus around a 50 basis point cut this time around, there are those that say Reserve Bank Governor Lesetja Kganyago will surprise the market with a repo rate cut of 100 basis points or more.
“Considering where we are right now and what’s happening in the world, there is no better time to cut the repo rate much more aggressively than the Reserve Bank has done in the past,” independent economist, Mike Schüssler, tells Moneyweb.
“A cut of 1% or even more could be on the table, especially because the Sarb now has more room to make such a bold move. This comes as other central banks around the world have made big rate cuts to try to mitigate the impact of the global coronavirus outbreak on their economies,” he adds.
Michael Jordaan, the erstwhile CEO of FNB and now a backer of BankZero (one of SA’s new digital banks), has been very vocal on Twitter over the last year, advocating for bigger repo rate cuts from the Reserve Bank to boost the economy.
On Wednesday he called on Kganyago to cut the rate by 1%. Since his appointment in 2014, Kganyago has never cut the rate by more than 25 basis points following an MPC.
We need a 100 basis point cut in rates tomorrow. But that isn’t nearly enough to rescue the real economy. We also need tax cuts for low-income earners and small businesses plus a direct income grant of R1000 to adult citizens. Stop bailing out zombie SOEs.
— Michael Jordaan (@MichaelJordaan) March 18, 2020
Speaking to Moneyweb he says South Africa needs massive monetary (policy) and fiscal responses to the crisis, which should include an interest rate cut of as much as the US Federal Reserve’s recent 1% cut.
“These are extraordinary times that require equally extraordinary responses while we bring the virus under control… There is a massive structural change in both supply and demand in the real economy. Normal rules don’t apply anymore. We need to be bold in cutting rates, cutting taxes and providing direct income grants to citizens,” he adds.
Jordaan reiterated his views that funding to “zombie” state-owned enterprises (SOEs), such as SAA, needs to stop. “This is a time to support citizens rather than to ideologically pursue state ownership,” he says.
Efficient Group’s chief economist Dawie Roodt agrees with Jordaan on SOEs like SAA and SA Express. “Now is the time to let them go, especially considering how South Africa’s fiscus is under even more strain due to the coronavirus.”
He believes there needs to also be monetary policy measures to help mitigate the economic ramifications of the global pandemic. However, Roodt says that the country can’t afford to have burdens on the fiscus, whether it is SAA or a bloated public wage bill.
On the repo rate, Roodt says that the market seems to be pricing in a cut of 75 basis points. “However, given the situation in the country, I believe a 100 basis points cut is very likely,” he adds.
“Our Reserve Bank governor has built up a reputation as a conservative central banker… This is not such a bad thing, because he has now accumulated a lot of dry ammunition. The Sarb is in a position to now aggressively slash the repo rate by up to 100 basis points,” Roodt points out.
“I don’t think they will go beyond that, but even a 1% cut is not going to save the economy. We will need to have some sort of fiscal stimulus too, as our economy was in recession even before coronavirus emerged,” he says.