Bank’s rates-cut­ting cy­cle may peter out

• Bench­mark hits low of 3.75% • Kganyago: pol­icy will re­spond to any se­cond-round ef­fects

Business Day - - FRONT PAGE - Lynley Donnelly, Lindiwe Tsobo and Odwa Mjo

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

/AFP (More re­ports in­side)

Fired up: An SA Po­lice Ser­vice of­fi­cer re­moves a burn­ing bar­ri­cade out­side the Booy­sens in­for­mal set­tle­ment, dur­ing a protest in Jo­han­nes­burg on Thurs­day. Res­i­dents are de­mand­ing their share of food parcels promised to dis­tressed com­mu­ni­ties in Gaut­eng.

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