South Africa

South Africa Monetary Policy July 2020

South Africa: SARB cuts repo rate again in July to new all-time low

On 23 July, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) lowered the repurchase rate by 25 basis points to 3.50%, coming in line with market expectations and marking a new record low. The decision was not unanimous as two of the five-member committee voted to hold the rate steady. The cut was the fifth in a row and brought total easing this year to 300 basis points.

The decision was underpinned by the need to provide further support to an economy that is being battered by the Covid-19 pandemic. In its new quarterly projections, the Bank now sees a sharper economic contraction this year than what it previously estimated in May amid collapsing investment, exports and employment. And although incoming data is showing signs of a pickup in activity, albeit from depressed levels, the road to pre-pandemic level of activity remains long. Regarding inflation, it has remained under control so far given the considerable economic slack. The Bank deemed that the risks to the inflation outlook remain balanced and expects that the subdued economic backdrop will keep it well below the midpoint of its 3.0%–6.0% target band this year.

Looking ahead, the policy outlook is less dovish than in May considering two members opted to stand pat this time around. Meanwhile the risks to the inflation outlook were described as balanced rather than to the downside, as was the case in the previous meeting. In addition, the SARB’s forecast model hinted that it is close to or at the end of the easing cycle.

Commenting on the potential direction of policy ahead, Andrew Matheny and Dylan Smith, economists at Goldman Sachs, noted:

“We now expect rates to remain on hold at 3.50% (from 3.25% previously) in the coming MPC meetings, especially as our near-term inflation and growth forecasts do not differ materially from the SARB’s. However, given that our medium-term inflation projection remains considerably more benign than the SARB’s (at 3.0% in 2021 vs. the SARB’s 4.3% forecast), we see risks tilted towards further monetary easing in H1 2021”.

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