The Reserve Bank cut interest rates by twice as much as economists predicted as it joined a global fight against the coronavirus outbreak that is threatening to plunge the world economy into a recession.
Governor Lesetja Kganyago and the rest of the monetary
policy committee (MPC) decided to reduce the repo rate by a full percentage point, the deepest cut in more than a decade, as they dramatically revised their inflation and growth forecasts downwards, saying GDP for the whole of 2020 would contract 0.2%.
That will be the first year of negative growth since 2009 when GDP shrank 1.5%, according to economists at Nedbank.
Though the magnitude of the cut is expected to provide some relief by reducing borrowing costs for consumers and businesses as fears of a recession in SA solidify, economists have said looser monetary policy alone will not be enough to shield the country from the coronavirus fallout.
The reaction in the currency markets was relatively muted. While the rand was down 1.9% at R17.4131/$ by 7pm, this compared to a 3% slide the previous day and came at a
time of general weakness in emerging markets.
"We are in market dislocation at the moment and that is why the reaction of the market was muted," said Nolan Wapenaar, head of fixed income at Anchor Capital SA.
"My shopping list was 200 basis points and some form of bond liquidity mechanism to help address the dislocation we’re seeing right now."
Economists surveyed by Bloomberg had expected a 50 basis point cut, with some saying that market volatility that pushed the rand above R17/$ and bond yields to their highest levels since the early 2000s would lead to some caution.
Under Kganyago, the Bank had only moved the repo rate by more than 25 basis points once, and that was to increase it by 50 basis points in January 2016.
The Bank joins its peers including the European Central Bank (ECB) and the US Federal Reserve in slashing rates, though it resisted joining them in announcing nonconventional measures. The ECB this week extended its quantitative-easing programme, in a policy reversal less than a week after its new president, Christine Lagarde, said it was not there to "close spreads".
Unlike those countries, where rates are either close to zero or negative, SA had not exhausted its conventional tools, Kganyago said. There was also no sign of stress in the local financial sector that required the use of extraordinary measures.
"We have taken the steps within our mandate to mitigate against the risks that the economy is exposed to," he said, adding that the Bank expected it would strengthen the resilience of businesses and households.
Deputy governor Kuben Naidoo said the Bank was in daily contact with the country’s major commercial lenders and "monitoring them quite closely" both operationally, including the health of staff, and to determine whether there "are stresses in the system. We feel that the present mechanisms we have are adequate to deal with those stresses."
Analysts have raised questions over what the market fragility means for the government as well as financially fragile state-owned entities.
Deputy governor Fundi Tshazibana said policymakers were "actively monitoring the situation" in government bond markets and had a number of mechanisms that would allow them to respond should that be necessary.
Along with the cut — which brings the repo rate to 5.25% — the Bank downgraded its growth and inflation forecasts.
It sees inflation averaging 3.8% in 2020, way below the midpoint of its 3% to 6% target range. Inflation would then accelerate to an average 4.6% in 2021, before slowing to 4.4% in 2022, it said.
The Bank’s quarterly projection model, which is not a forecast, signalled three cuts of 25 basis points each, in the second and fourth quarter of 2020, as well as in the third quarter of 2021.
The decision to front load these and add another reduction came against the backdrop of supply and demand side constraints in the economy, said Sanisha Packirisamy, economist at Momentum Investments.
The Bank wanted to get the "best bang for its buck" in the face of SA’s dismal confidence levels, she said. It had policy room to cut rates further if _needed — though it was likely to take "a wait-and-see approach".
The government has promised a package of economic support measures, which it has yet to outline, though there is limited room in the fiscus, which was already under pressure before the virus struck.
The cut "will not offset the global recession that is coming. What this can do is help encourage a rebound from economic distress once this virus issue is finally solved", said Jameel Ahmad, FXTM global head of currency strategy and market research.
"There is definitely still a case for more stimulus – look at the global central bank narrative right now."
Correction: March 20 2020
An earlier version of this article incorrectly said bond yields fell to their lowest levels since the early 2000s. They actually rose to their highest levels since the early 2000s.
With Anathi Madubela and Odwa Mjo
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