Bank’s rates-cutting cycle may peter out
• Benchmark hits low of 3.75% • Kganyago: policy will respond to any second-round effects
The Reserve Bank, which cut interest rates to a record low to support an economy battered by Covid-19, signalled its aggressive rate-cutting cycle could be petering out, helping to push the rand to its strongest level since SA embarked on lockdown.
The Bank, which reduced the repo rate by a full percentage point at each of its meetings in March and April, cut the repo rate by 50 basis points on Thursday as predicted in Reuters and Bloomberg surveys. The call on the magnitude of the cut, which took the benchmark rate to a record low of 3.75%, was not unanimous. Two of the five monetary policy committee (MPC) members voted for a reduction of 25 basis points.
Some economists said this suggested that sharp cuts are bottoming out, with the Bank likely to wait and see how the economy responds to promises of a slow reopening and easing of restrictions. While the Bank’s model suggested two reductions of 25 basis points each for the rest of 2020, this did not take into account Thursday’s move. “We think that where we are we have provided a lot of support to the economy, but going forward we will continue to be guided by the data,” said governor Lesetja Kganyago.
The rand got an immediate boost. From being 0.6% firmer just before the announcement, it extended its gains and was 1.7% stronger at R17.6227 by 7pm, having earlier hit its strongest level since March 27, the day Moody’s Investors Service downgraded SA to junk and the Covid-19 lockdown began.
Most economists polled had been expecting a cut of 50 basis points, said Nolan Wapenaar, Anchor Capital co-chief investment officer. However, the market got “ahead of itself” and priced in the possibility of a full percentage point, sparking the rally in the rand. “Today will probably mark the end of the interest-rate cutting cycle.”
By being more hawkish than its peers, the Bank can drive rand strength by boosting the appeal of holding assets denominated in rand. Thursday’s move
was the fourth of 2020, cutting the repo rate by 275 basis points in total.
The Bank again slashed its forecast for the economy, and now expects a GDP contraction of 7% for 2020 versus a 6.1% drop forecast in April. It sees GDP rebounding 3.8% in 2021.
It also revised its inflation outlook, pencilling in an average of 3.4% for 2020 and 4.4% in 2021 and 2022, down from April’s forecasts of 3.6%, 4.5% and 4.4%. Kganyago said risks were still to the downside. The Bank’s economic research head, Chris Loewald, said inflation could breach the lower end of the 3%-6% target range this year due to lower oil prices. Kganyago said the Bank would treat this the same way it treated any breaches of the target.
“We will see through the shock, and see whether there are any second-round effects,” he said. If second-round effects were evident, monetary policy would respond accordingly.
“I think they have done a lot of front-loading in the last two months,” said independent economist Elize Kruger. The Bank was likely to move to “a neutral stance for now”, she said. The Bank’s quarterly projection model had indicated another two 25-basis-point-cuts in the next two quarters of 2020, which the bank front-loaded with Thursday’s decision, said Kruger. That two MPC members wanted a smaller cut suggested the Bank was moving closer to the bottom of the rate-cutting cycle, said Stanlib chief economist Kevin Lings. “To get another cut, you would need to be talking about a much weaker economy,” he told Business Day.
The decision not to cut by a steeper 100 basis points was a “missed opportunity”, said Johann Els, chief economist at Old Mutual Investment Group. Els said the deeply negative GDP growth outlook and falling inflation “significantly increases the risk of a policy error”.
1.7% the increase in the rand’s value against the US dollar on Thursday to R17.6227 by 7pm, having earlier hit its strongest level since March 27