A dismal GDP reading showing SA on track for its worst economic performance in about a century could seal the case
for another interest-rate cut by the Reserve Bank before the year is out.
Statistics SA data on Tuesday will probably show that the economy contracted 49% in the second quarter, covering the period at which SA’s lockdown was at its most severe, according to a Bloomberg survey of 13 economists. That reading, and the implications of demand in the economy remaining depressed, may give policymakers the room to cut the main interest rate, which is already at the lowest level in about half a century, by another 25 basis points as early as the September meeting, economists said.
Despite trimming the repo rate by a combined three percentage points in 2020 and embarking on other measures such as easing regulation to facilitate lending by commercial lenders, the Bank has come under pressure to do more. But whether a cut comes at the monetary policy committee meeting (MPC) set for September, or in November, will depend on the Bank’s judgment on how its stimulus efforts so far have filtered through to consumers and businesses, economists said.
"Muted inflationary pressures imply the Bank’s next move will hinge on growth," said Bank of America Securities’ SA economist Rukayat Yusuf, who sees the repo rate being cut another 25 basis points to 3.25% at the MPC meeting on September 17. The investment bank expects GDP to have shrunk 45% on a quarter-on-quarter and annualised basis.
The Bank’s latest inflation forecast is for an average 3.4% for 2020, well below the midpoint of its 3%-6% target range, where it says it wants the rate to be anchored. It sees inflation accelerating to 4.3% in 2021 and 2022.
While the pace of the recovery since the government started easing lockdown restrictions is uncertain and the economy faces headwinds from Eskom’s power cuts, the last reduction in July wasn’t unanimous with two of the five members voting to keep it steady.
At the time, governor Lesetja Kganyago flagged that the rapid cuts provided since March had yet to filter through to the economy.
"They’ve done a lot," said Gina Schoeman, SA economist for Citibank. She said the lockdown meant that "people have not had a chance to use that stimulus, so that might mean they want to wait a little bit longer". Citi is expecting another 25 basis point cut only in November, after finance minister Tito Mboweni presents the medium-term budget policy statement (MTBPS) in October, which markets will be watching for plans to fix the country’s fiscal position and push for growth-enhancing structural reforms. That may have a bearing on SA’s borrowing costs in the bond market and the value of the rand.
"The October MTBPS is a higher-risk premium so they might want to wait to see [the outcome of] that," she said.
Johann Els, chief economist at Old Mutual Investment Group, said the Bank might well be over its cutting cycle, given the recent split decision. Two of the five-member MPC voted to keep policy unchanged in July. Nevertheless recent pronouncements by the US Federal Reserve, in which it suggested that it would tolerate inflation above its 2% for some time, may give the Reserve Bank space "to keep local rates flat for longer" and start hiking slowly from 2022, he said.
US inflation is running at only about half the Fed’s target, and the policy stance implies that tightening in the world’s largest economy will not come for a long time, making it more attractive to hold higher-yielding assets such as SA bonds, giving the central bank the ability to stay dovish without diminishing that rates differential.
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