Rates to fall a modest 25 bps on March 19

The Reserve Bank will cut rates by 25 basis points next week to lift the economy out of recession, easing less aggressively than other global central banks trying to mitigate damage from the coronavirus outbreak, a Reuters poll forecast.

On Wednesday, the Bank of England followed the United States Federal Reserve’s surprise 50 basis point rate cut the previous week, and several central banks, such as the Reserve Bank of Australia and the Bank of Canada, have also cut rates recently.

In a March 6-11 Reuters poll, 12 economists said the South African Reserve Bank (Sarb) would cut its repo rate by 25 basis points to 6.0% on March 19, while five said it would deliver a 50 basis point cut. The other four said it would keep rates on hold.

Economists responding to an extra question gave a median 65% probability the Sarb would cut this month. Median rate forecasts showed the repo rate falling to 5.75% in the second quarter and finishing the year at that level.

“The Sarb has nothing to lose: inflation is slowing, the economy is back in recession, it is amongst the two most vulnerable EMEA economies to coronavirus, and the Fed is giving it some leeway,” said Francesca Beausang, senior economist at Continuum Economics.

So far, the reported rate of coronavirus infection appears to be very slow in South Africa compared with other parts of the world.

Growth prospects trimmed

The poll suggested inflation would average 4.2% this year, 0.2 percentage points slower than in last month’s survey and compared with the last reported rate of 4.5%.

South Africa’s statistics agency confirmed the economy entered its second recession in two years late last year as agriculture, transport and construction activity contracted, with an unreliable power supply the main impediment to growth.

Growth prospects were trimmed markedly by 0.5 percentage points to 0.3% for this year and by 0.1 percentage point to 1.2% for next year, compared with last month’s poll.

“The Sarb will have to cut its inflation and growth forecasts notably at this meeting and with oil price at mid-30s ($ per barrel) and global interest rates declining, they have room to add stimulus,” said Elize Kruger, an independent economist.

South Africa’s central bank rescued its economy from the 2008-09 global financial crisis by cutting interest rates a cumulative 700 basis points through to 2012. But the Sarb has not cut in increments larger than 25 basis points since then.

The economy contracted in nine quarters since 2014, triggered by fractured relations between labour and business in its crucial mining sector, mainly in the platinum belt.

Electricity power constraints have weighed on growth and, although inflation has moderated, stimulus has been limited to four 25 basis point cuts in the past three years.

“South Africa’s forward rate agreements curve is currently factoring in close to 50 basis points of cuts in the repo rate for this year,” said Investec chief economist Annabel Bishop.

“South Africa may see a 25 basis point cut in its rates as early as this month. With Moody’s credit rating agency warning that South Africa’s monetary policy remains tight, the repo rate is close to its current cycle high,” she added.