South Africa

South Africa Monetary Policy May 2020

South Africa: SARB further cuts rate to new record low in May

On 21 May, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) slashed its main lending rate by 50 basis points to 3.75%. The decision was not unanimous, with two out of five MPC members voting for a smaller 25 basis point cut. The chop came on the heels of a 100-basis-point cut in April’s emergency meeting and brought the rate to a 50-year low. As a result, rate cuts for this year now total 275 basis points.

A rapidly deteriorating economic backdrop and subdued inflation led the Bank’s decision. The South African economy is set to shrink dramatically in Q2 as severe lockdown measures hinder domestic activity while travel restrictions and collapsing external demand batter the external sector. According to the MPC, rate cutting should “ease financial conditions and improve the resilience of households and firms to the economic implications of Covid-19”, while easing of regulatory requirements on banks should “ensure adequate liquidity in domestic markets”. Further supporting the Bank’s decision , inflation fell in recent months amid contracting activity and low oil prices.

Looking forward, the SARB does not rule out further monetary policy easing, in order to boost support for an economy strangled by the health crisis. With inflationary risks tilted towards the downside in the coming months and an unprecedented economic contraction projected for the second quarter of this year, the Bank is likely to cut rates again as early as July.

Commenting on the monetary policy outlook, Andrew Matheny and Dylan Smith, economists at Goldman Sachs, appear less bullish on further rate cutting, however, saying:

“Our own forecasts are very similar to the SARB’s in the near term, although our 2021 inflation outlook is significantly more benign (at 3.6% as compared to the SARB’s 4.4%). Accordingly, we maintain a baseline forecast of no further easing from the SARB and expect the policy rate to remain on hold at 3.75% through end-2021. However, we see some risk of a further rate cut in H2 2020 stemming from downside risks to growth (with the Q1 GDP print likely to be a focus) and the recent Rand strengthening (which could trigger a downward revision to the 2021 inflation outlook).”

The MPC’s next meeting will be held on 23 July.

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