The SA Daily
20 March 2020
A deep cut of real relief
- The SARB’s unexpectedly deep cut of 100 bps yesterday takes the repo rate to 5.25% (and prime lending to 8.75%). We had only expected such levels to be reached by this December, having foreseen more gradual monetary policy easing. This deep cut comes as a relief against the backdrop of economic growth. The SARB now forecasts GDP to contract by 0.2% this year before recovering to 1.0% in 2021.
- The SARB’s years-long drive for inflation expectations anchored around the 4.5% mid-point of the 3-6% inflation target has ensured the requisite monetary policy space in times of shocks, such as is indeed now the case. In fact, the SARB is better placed in terms of the level of nominal interest rates to ease than major central banks.
- The SARB’s inflation forecast of 3.8% this year implies a real repo (policy) rate of 1.45% (from 2.5% in 2019). In 2009, when the SA economy contracted by 1.5%, the real repo rate averaged 1.46%. Then, however, the inflation dynamics were different, with inflation expectations at 7.8% – 8.3%. Right now, inflation expectations are around 4.4% – 4.8% over the medium term. Therefore, should the SA economy deteriorate even further, the SARB can still provide some support
- The coronavirus pandemic is still crippling financial assets: the rand is at R17.34/$, the SA 10-year bond yield is at 11.816%, and the All Share Index has plummeted 33% since January. And, available data shows that this week non-residents have sold R11.48bn of SA bonds and R3.35bn equities. Positive bond and currency market reactions to the deeper-than-expected rate cut were fleeting, overshadowed by growing fiscal and growth concerns.
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