Surprise cut may not be the last

Reserve Bank governor Lesetja Kganyago has a reputation for being a hawk, and yet in the last two meetings he has surprised his detractors by cutting interest rates. The magnitude of Thursday’s adjustment will have taken many by surprise, even those who say the percentage-point cut in the repo rate in the circumstances was not enough. Thinking that you know what the central bank will do is clearly not the same thing as accurately predicting what it will do.

Coming in the midst of a blowout in currency and bond markets, expectations for such a bold move were not high going into the meeting. The median estimate of economists in a Bloomberg poll was a cut half the size of what was eventually delivered.

Not one of the 21 expected a cut of more than 50 basis points, and money markets were pricing in something slightly bigger. History was definitely on their side. Since he replaced Gill Marcus in November 2014, Kganyago has moved by more than 25 basis points on one occasion, and that was to increase the repo rate by 50 basis points early in 2016.

Desperate times require desperate measures. The coronavirus has wreaked havoc in markets and economies around the world. Stock market plunges and currency collapses have reduced individuals’ and nations’ wealth in a matter of months. And we still don’t know where it will end.

The Bank’s growth forecasts are depressing enough. But based on anecdotal evidence on the magnitude of revisions that private lenders are making to their forecasts, they may yet prove optimistic. It’s not uncommon for them to be looking at economic contraction for 2020 to be north of 1% and even 2%. According to its latest forecasts released as it announced its rates decision on Thursday, the Bank sees the economy contracting 0.2%, which will be the first year of negative growth since 2009. As grim as that is, there are risks to the downside. Before the virus struck, SA was already being hit by Eskom and its power failures, as well as policy and political uncertainty that has seen business and consumer confidence plunge. Even as he delivered the biggest monetary stimulus of his time in office, Kganyago stressed that it was not the role of monetary policy alone to support economic growth. True enough, but only the ultra-optimists will expect much progress from the government side. If the Bank’s growth forecasts ultimately prove to be too optimistic, then it is likely that its inflation predictions will also be out of kilter with reality. As things stand, it sees consumer price growth averaging 3.8% for 2020, before accelerating to 4.6% in 2021 and then 4.4% the year after.

With so much uncertainty around, it is almost tempting to say that one should not take any forecast with a lifespan of more than a couple of months seriously.

Rather than inflation, some people are beginning to seriously talk about the potential of deflation — a prolonged period of falling prices — stalking the global economy. Fear of that “d” word and the impact on economies is what brought us the period of extraordinarily loose monetary policy in the wake of the financial crisis just over a decade ago. There is every indication that this crisis we are in the middle of may even be worse.

The Bank’s monetary policy committee is often criticised for being obsessed with inflation, which is a strange criticism to level against any central bank, especially one that is required “to maintain price stability in the interest of balanced and sustainable economic growth”. Whether obsession with inflation is good or bad is almost academic now. It is almost certain that in pursuing that mandate alone, the Bank will have room to cut again this year as reality points to it missing the 3%-6% target to the downside.

The muted reaction in the rand, possibly explained by the fact that SA’s cut is still not as deep as what has been seen in the US, may be a sign that more bold action can be taken without risking a market meltdown locally.

THE RESERVE BANK IS LIKELY TO HAVE ROOM TO CUT INTEREST RATES AGAIN THIS YEAR