Despite Covid-19 the MPC should decrease the Repo rate further

JOHANNESBURG – Although many businesses, financial analysts, economists, the public and even in governmental circles feel that the Monetary Policy Committee (MPC) of the SA Reserve Bank must lower the repo rate at its meeting to counteract the devastating effects of Covid-19, the MPC should do it solely on its “mandate”.

The MPC had set itself a target of 4.5 percent, the midpoint between 3 percent and 6 percent as a “default” rate to change the repo rate. The MPC by various occasions had stressed that the midpoint target is based on expected inflation and not on the current or historical level.

In this regard the inflation rate came in at 4.1 percent for March, just after their previous emergency meeting on 14 April. It is expected that the inflation rate for April, which will be announced next week, stablished at 4 percent and given the sharp decrease in fuel prices at the beginning of May should decrease even further to 3.5 percent.

This should support the Reserve Bank’s inflation forecast of 3.6 percent for 2020 and 4.5 percent for 2021. Given this expected rates, the MPC should decrease the repo rate by at least 50 basis points although 100 basis points should be more applicable. 

Another worrying aspect for the MPC is around the value of the Rand as a strong upside risk to the inflation forecast. At the previous meeting, South Africa was yet excluded from the Global Government Bond index (that was done on 30 April) on the back that Moody’s also downgraded South Africa to junk in March.