Fri, 21 Feb 2020

The Reserve Bank this week unexpectedly cut the repo rate by 25 basis points to 6.25%, and some economists have noted that another rate cut later in the year cannot be ruled out entirely.

The SA Reserve Bank's (SARB) monetary policy committee (MPC) met this week and unanimously agreed to cut the repo rate, which is the benchmark interest rate at which the SARB lends money to other banks. The cut was justified by the moderation in the inflation outlook and an improved inflation risk profile.

The medium-term forecasts for consumer inflation were revised lower to average 4.1% for 2019 (down from 4.2%) and 4.7% for 2020 (down from 5.1%) and 4.6% in 2021 (down from 4.7%). Economic growth projections were also lowered - down from 0.5% for 2019 to 0.4% and down from 1.4% for 2020 to 1.2%.

"The SARB's decision to cut the policy rate came earlier than initially anticipated," senior FNB economist Siphamandla Mkhwanazi commented. He explained that the bank determined that domestic risk events such as the upcoming National Budget speech in February and Moody's ratings decision, as well as global risks such as US-Iran tensions, were outweighed by the lower domestic inflation and weak economic growth.

The economist expects the Reserve Bank to keep near-term interest rates "relatively steady", given the fiscal challenges of the country.

The Reserve Bank's quarterly projection model (QPM) signals two repo rate cuts of 25 basis points in 2020. However, this is a "broad policy which could change in either direction" between MPC meetings, Investec economist Lara Hodes noted.

Reserve Bank cuts repo rate

Momentum Investments economists - Herman van Papendorp, Sanisha Packirisamy and Roberta Noise - reiterated these views in an analysis report they authored on the latest MPC decision. "The January 2020 QPM suggests one more cut of 25 basis points in the fourth quarter of 2020, following January's cut. The MPC suggested it would continue to assess data and risk changes and use the QPM as a guiding tool for future monetary policy decisions," the economists said.

"While Moody's March ratings review is likely to dissuade the committee from cutting interest rates again at the March 2020 interest rate-setting meeting, further expected downgrades to the SARB's inflation and growth forecasts prevent us from ruling out an additional cut later in the year," they added.

This week the Reserve Bank will release its leading indicator for November 2018 and December inflation figures.

The leading indicator is used to project significant changes in the economy. According to the FNB weekly economic bulletin published on Friday, the November reading is expected to remain "lackluster" amid a weak economic climate.

In turn, FNB economists expect December inflation to accelerate to 4.1%, up from the decade low of 3.6% recorded in November. The potential increase will be attributed to the 22c/l hike in the petrol price for that month, the bulletin read.

More China News

Access More

Sign up for China News

a daily newsletter full of things to discuss over drinks.and the great thing is that it's on the house!