SA Reserve Bank Cuts Repo Rate By 50 Basis Points

THEBE MABANGA

THE SOUTH AFRICAN Reserve Bank has cut the repo rate by 50 basis points in a move that is likely to reinforce its hawkish, or conservative, monetary policy stance.

The bank’s Governor Lesetja Kganyago said three members of the Monetary Policy Committee (MPC) preferred 50 basis points cut while the other two preferred a 25 basis point.

The central bank also announced that its Quarterly Projection model, an internal policy guide that it uses, projects two cuts of 25 basis points each over the next two quarters.

The latest cut leaves the repo rate at 3.75 % even as economic outlook worsened while inflation outlook improved.

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The Reserve Bank now expects the South African economy to contract by 7% in 2020, compared to 6.1% when the MPC met in April.

At the same time, the bank expects inflation to hover around 4.5% the mid-point of its 3% to 6% target range over the next three years.

Kganyango acknowledged the continued spread of the novel coronavirus but suggested the worst is over economically.

“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,” Kganyago said in the MPC statement.

“The strength of the global economic recovery will depend in part on how quickly countries are able to open up for economic activity safely, and in particular how effectively societies comply with social distancing rules.”

Kganyago noted a tough environment for emerging markets with the outlook for South Africa bleak.

“Emerging and developing economies generally have less policy space available and credit is more expensive,” Kganyago said

“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.”

Kganaygo, supported by his deputies, expressed satisfaction that the measures that the central bank has put in place are adequate and working.

In addition to the rate cuts totalling 250 basis points since March, the Reserve Bank relaxed regulatory requirements for commercial banks, purchased R11.4 billion worth of government bonds in April and increased the frequency of borrowing auctions for market players.

Despite all this, Kganyago acknowledged the limits of monetary policy and noted that South Africa has seen foreigners sell R149 billion worth of shares and bonds since the COVID-19 outbreak.

“Monetary policy can ease financial conditions and improve the resilience of households and firms to the economic implications of COVID-19,” Kganyago said.

“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 that lower costs generally, and increase investment opportunities, potential growth and job creation.”

The next statement of the Monetary Policy Committee will be released on 23 July 2020, although the bank can act before then should the need arise.

(Compiled by Inside Politics staff)

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