THEBE MABANGA
THE South African Reserve Bank Monetary Policy Committee (MPC) stuck to market expectations and cut the repo rate by 25 basis points, taking it to 3.5 %.
Three members preferred a cut of 25 basis points and two preferred to keep rates on hold.
Raymond Parsons, Professor at the North West University Business School, said “a 25 basis points cut is positive but a 50 basis points cut is better.”
The bank also maintained its gloomy, if slightly optimistic, outlook for growth. The bank now expects GDP in 2020 to contract by 7.3%, compared to the 7 % contraction it expected in May. Some private sector economists forecast a contraction of around 10%.
“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,” the MPC said in its statement.
The bank says according to the Quarterly Projection Model, an internal policy guide it uses to guide the rates path, it now expects one repo rate cut of 25 basis points in the fourth quarter of 2020 and for the repo to remain unchanged in the first quarter of 2021.
The current level of the repo is the lowest since the framework was adopted in May 1998, according to Reserve Bank governor Lesetja Kganyago.
The bank says easing of the lockdown has supported growth through uptick in economic activity in recent weeks but notes that returning to pre-COVID-19 levels will take time.
The bank now expects GDP growth to reach 3.7% in 2021 and 2.8% in 2022.
It has never stated what sectors it expects the positive growth to come from, apart from the fact that growth will be coming from a low base.
The bank expects the oil price to average $45 per barrel next year and $ 50 in 2022.
Most importantly, the bank sees no threat inflation, whose core mandate it is to control.
The bank expects inflation to average 3.4 % this year and 4.3 %, or the midpoint of its target range, over the next two years
The MPC noted that the bond markets have priced in South Africa’s increased borrowing through higher rates of return.
“The yield curve is exceptionally steep,” its statement said “reflecting credit risk associated with high public borrowing needs”
In both the statement and in taking questions afterwards, Kganyago maintained that the bank has done all it can to aid the economy and it was now left to government to boost economic growth.
“Monetary policy can ease financial conditions and improve the resilience of households and firms to the economic implications of COVID-19,” the MPC said, reiterating the measures it has taken thus far.
“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,” the MPC said in reference to its government bond buying programme it has embarked on since March.
The bank then absolves itself of further responsibility when it notes: “As indicated previously, 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.”
The MPC is due to next sit in September, unless a drastic change in circumstances dictates a need for an emergency meeting.
(Compiled by Inside Politics staff)
