Bank joins global fight against coronavirus
Governor Lesetja Kganyago and the MPC deliver the deepest rate cut in more than a decade
The Reserve Bank cut interest rates by twice as much as economists predicted as it joined a global fight against the coronavirus outbreak that is threatening to plunge the world economy into a recession.
Governor Lesetja Kganyago and the rest of the monetary policy committee (MPC) decided to reduce the repo rate by a full percentage point, the deepest cut in more than a decade, as they dramatically revised their inflation and growth forecasts downwards, saying GDP for the whole of 2020 would contract 0.2%.
That will be the first year of negative growth since 2009 when GDP shrank 1.5%, according to economists at Nedbank.
Though the magnitude of the cut is expected to provide some relief by reducing borrowing costs for consumers and businesses as fears of a recession in SA solidify, economists have said looser monetary policy alone will not be enough to shield the country from the coronavirus fallout.
The reaction in the currency markets was relatively muted.
While the rand was down 1.9% at R17.4131/$ by 7pm, this compared to a 3% slide the previous day and came at a time of general weakness in emerging markets.
“We are in market dislocation at the moment and that is why the reaction of the market was muted,” said Nolan Wapenaar, head of fixed income at Anchor Capital SA.
“My shopping list was 200 basis points and some form of bond liquidity mechanism to help address the dislocation we’re seeing right now.”
Economists surveyed by Bloomberg had expected a 50 basis point cut, with some saying that market volatility that pushed the rand above R17/$ and bond yields to their lowest levels since the early 2000s would lead to some caution.
Under Kganyago, the Bank had only moved the repo rate by more than 25 basis points once, and that was to increase it by 50 basis points in January 2016.
The Bank joins its peers including the European Central Bank (ECB) and the US Federal Reserve in slashing rates, though it resisted joining them in announcing nonconventional measures. The ECB this week extended its quantitativeeasing programme, in a policy reversal less than a week after its new president, Christine Lagarde, said it was not there to “close spreads”.
Unlike those countries, where rates are either close to zero or negative, SA had not exhausted its conventional tools, Kganyago said. There was also no sign of stress in the local financial sector that required the use of extraordinary measures.
“We have taken the steps within our mandate to mitigate against the risks that the economy is exposed to,” he said, adding that the Bank expected it would strengthen the resilience of businesses and households.
Deputy governor Kuben
Naidoo said the Bank was in daily contact with the country’s major commercial lenders and “monitoring them quite closely” both operationally, including the health of staff, and to determine whether there “are stresses in the system. We feel that the
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