South Africa Cuts Key Rate Fourth Straight Time to Record Low

(C) Bloomberg. A sign advising passengers must wear protective face masks hangs on a beam at the Randburg taxi rank in Johannesburg on May 14. Photographer: Waldo Swiegers/Bloomberg

(Bloomberg) —

The South African Reserve Bank cut its benchmark interest rate for the fourth time in four months in a bid to support an economy forecast to slump deeper into recession as a nationwide lockdown to curb the spread of the coronavirus halted most activity.

The monetary policy committee voted to lower the repurchase rate to 3.75% from 4.25%, Governor Lesetja Kganyago said Thursday. That’s the lowest since the rate was introduced in 1998. Of the five panel members, three favored a 50 basis-point cut and two preferred 25 basis points of easing. All but one of 20 economists in a Bloomberg survey said the Reserve Bank would reduce the benchmark interest rate, with predictions for the cut ranging from 25 to 100 basis points.

Key Insights

• The central bank sees the economy contracting by 7% in 2020, even worse than its previous estimate of a 6.1% decline in output, as a result of the prolonged business restrictions that started on March 27. Output could increase by 3.8% next year and 2.9% in 2022, Kganyago said.
• The MPC prefers to anchor inflation expectations near the 4.5% midpoint of its target band and consumer-price growth is now set to average 3.4% this year, compared to the April projection of 3.6%. The average rate will peak at 5% in the second quarter of next year and remain inside the target band until at least the end of 2022.
• The central bank’s quarterly projection model now forecasts a repurchase rate of 3.63% by the end of this year and 4.1% by the end of 2021.
• While the Reserve Bank has been criticized by politicians and labor unions, who say it should be doing more to boost growth and help reduce the country’s 29% unemployment rate, it has already lowered the key rate by 275 basis points this year and more than doubled its holdings of South African government debt, helping to bring down borrowing costs in the domestic market.

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