Reserve Bank cuts repo rate

The South African Reserve Bank has cut the repo rate by 100 basis points.

“This takes the repo rate to 4.25% per annum, with effect from 15 April 2020. The decision was unanimous,” Governor of the South African Reserve Bank, Lesetja Kganyago, said in statement on Tuesday.

He said the implied path of policy rates over the forecast period, generated by the Quarterly Projection Model, indicates five repo rate cuts of 25 basis points, extending into the first quarter of 2021.

“Monetary policy can ease financial conditions and improve the resilience of households and firms to the economic implications of COVID-19.

“In addition to continued easing of interest rates, the Bank has taken steps to ensure adequate liquidity in money and government bond markets, and to ease capital requirements to free capital for onlending by financial institutions,” Kganyago said.

He said each of these steps makes more capital available to households and firms.

“Monetary policy, however, cannot on its own improve the potential growth rate of the economy or reduce fiscal risks. These should be addressed by implementing prudent macroeconomic policies and structural reforms that lower costs generally, and increase investment opportunities, potential growth and job creation,” he said.

The International Monetary Fund (IMF) estimates that global growth will contract by about 2.9% as a result of the COVID-19 pandemic, which has spread globally and its impact is being felt through all economies.

“The COVID-19 outbreak will have a major health and social impact, and forecasting domestic economic activity presents unprecedented uncertainty.  With that in mind, the Bank expects GDP in 2020 to contract by 6.1%, compared to the -0.2% expected just three weeks ago.  GDP is expected to grow by 2.2% in 2021 and by 2.7% in 2022,” Kganyago said.

South Africa’s lockdown was recently extended by an additional 14 days, bringing the total lockdown period to 35 days.

“Both the supply and demand effects of this extension reduce growth and deepen it in the short-term, as businesses stay shut for longer and households with income spend less.

“This will likely also increase job losses, with further consequences for aggregate demand.  The impacts will be particularly severe for small businesses, and individuals with earnings in the informal sector,” Kganyago said.

He said current indications from the World health Organisation are that the pandemic is unlikely to end quickly, with shorter, less virulent waves hitting over time.

“The uncertainties of the crisis have led to extremely high volatility in financial asset prices, with sharp and deep market sell-offs followed by a partial recovery.  At this stage, the sustainability of that recovery remains uncertain, and global markets remain in risk-off mode.

“This has implications for emerging markets and South Africa in particular, as investor appetite for rand-denominated equities and bonds is expected to remain weak,” the Governor said.