Covid-19 crisis could see another 1% Sarb repo rate cut

With South African Reserve Bank (Sarb) Governor Lesetja Kganyago indicating that there’s room to cut the repo rate by another 125 basis points between now and the first quarter of next year, some economists say he might pull another surprise 1% cut today.

Watch: Sarb announces interest rate decision (live at 3pm)

The bank’s scheduled Monetary Policy Committee (MPC) meeting for May concludes today, and South Africans will be keenly listening to the official repo rate announcement at around 3pm. (You can watch it live right here on Moneyweb).

A number of economists speaking to Moneyweb say that SA’s Covid-19 economic fallout could be the catalyst for the third 100 basis point cut in a row this afternoon.

While independent economist, Mike Schüssler, and Lumkile Mondi of the School of Economics and Business Science at Wits, both believe that the Sarb should bite the bullet with another aggressive 1% cut; FNB economist Siphamandla Mkhwanazi says he won’t be surprised by such a move.

“The Sarb should go for another 100-basis point repo rate cut now, in the face of a worsening Covid-19 economic crisis. They should do it quickly to get the economy going, so that it [the stimulus effect of another big rate cut] works through the economy faster,” says Schüssler.

With the central bank having room to manoeuvre from a monetary policy standpoint, he adds that instead of drawing out further rate cuts over the rest of the year, a bigger cut now would be more beneficial to the economy.

“Cutting the repo rate cut now, by the most that it can, will mean a longer period of low interest rates and a greater impact on the economy. The Sarb can review the situation around August or September, when Covid-19 infections are expected to peak in South Africa,” Schüssler says.

Read: Charts that show Sarb ‘U-turn’ due to virus

Mondi is expecting a repo rate cut of between 50 and 100 basis points. “I would argue for the latter as unprecedented times call of unprecedented measures,” he adds.

“The Sarb should go big or go home. These are not normal circumstances and the economy is facing a jobs bloodbath, with people queueing for food and many businesses still not operating due to the lockdown,” he says.

“I am very worried about the economic outlook. Even with the easing of Covid-19 lockdown measures, there is still likely to be a lack of demand due to falling income levels and job losses. This paints a picture of lower inflation for quite some time, despite hikes in electricity prices and food inflation,” notes Mondi.

“We need to put as much cash as possible back into households to stimulate consumption. Hard hit businesses will also benefit from another big interest rate cut,” he says.

After the Sarb’s emergency MPC meeting in April, Kganyago pointed out: “The implied path of policy rates over the forecast period generated by the [Sarb’s] Quarterly Projection Model indicates five repo rate cuts of 25 basis points extending into the first quarter of 2021.”

Read: Interest rates: More cuts coming, but pensioners won’t be happy

“Monetary policy can ease financial conditions and improve the resilience of households and firms to the economic implications of Covid-19. In addition to continued easing of interest rates, the Bank has taken steps to ensure adequate liquidity in money and government bond markets and to ease capital requirements to free capital for onlending by financial institutions. Each of these steps make more capital available to households and firms,” he added.

Meanwhile, FNB’s Mkhwanazi says that with disinflation expected in some segments of CPI, such as housing and rentals, overall inflation is likely to even dip below 3% this year.

“With further repo rate cuts of up to 125 basis points still in the system, I won’t discard a 100-point cut today… At FNB, we are expecting at least a cut of 50 basis points, but an even larger cut will have a greater stimulatory effect on the economy,” he adds.

“Front loading another bigger repo rate cut now will be more beneficial to consumers and businesses amid the deteriorating Covid-19 economic situation,” says Mkhwanazi.

Other economists, such as Investec’s Annabel Bishop and independent economist Prof Bonke Dumisa, are much more conservative, anticipating a repo rate cut of between 25 and 50 basis points today.