Bank may cut repo rate again soon

The SA Reserve Bank (Sarb) is expected next week to cut its repo rate for the fifth time this year, most likely by 25 basis points to the near-record low of 3.5% as the Covid-19 pandemic batters the economy, a Reuters poll found.

The last time interest rates were this low was in 1973, at the height of the energy crisis which followed Middle East nations drastically cutting oil production.

The Sarb cut rates in May by 50 basis points after the economy was shut down to limit the spread of the novel coronavirus. That followed two aggressive 100 basis point cuts in succession in March and April.

But the decision at the 23 July meeting is in the balance. The 9 to 16 July poll found 13 of 28 economists expected a 25 basis point cut and two expected 50 basis points to 3.25%. Thirteen said rates would be unchanged.

“Given growth risks, the Sarb will be willing to ease further, perhaps even accommodating a negative real repo rate temporarily in 2021,” Razia Khan, head of research for Africa and the Middle East at Standard Chartered, said.

“Although the Sarb introduced secondary-market bond purchases in March, this was in response to significant market dislocations. Monetary accommodation is likely to happen through more conventional rate cuts,” Khan added.

The local bond yield curve had steepened in recent months as investors fretted over the long-term sustainability of gross debt.

Median forecasts from the poll suggest rates are expected to be left at 3.5% for the remaining September and November meetings this year.

Annual inflation in South Africa has moderated sharply to 2.1% and is expected to average 3.4% this year before quickening to 4.1% next year.

South Africa’s economy is expected to contract 38.7% in the last quarter, the poll found. That would be the most since comparable records began in 1993.

It would follow a 2.0% contraction reported for the first quarter of the year, before the economy largely shut down in March.

The economy is forecast to partially bounce back by an annualised 19.3% in the three months to September and grow in all of the following quarters. – Moneyweb