S. Africa Cuts Interest Rate to 6-Year Low to Tackle Virus Fallout

(Bloomberg) --

The South African Reserve Bank may have to go further than its biggest interest-rate cut in more than a decade to support an economy that’s expected to shrink from the impact of the coronavirus.

The monetary policy committee voted to lower the repurchase rate by a full percentage point to 5.25%, Governor Lesetja Kganyago said Thursday. The announcement was streamed online from in the capital, Pretoria after the government announced measures to limit public gatherings and engagements to halt the spread of the pandemic.

The MPC now projects the economy will contract by 0.2% this year compared with a forecast of 1.2% growth given in January. That’s still more optimistic than estimates from economists such as Intellidex’s Peter Attard Montalto, who sees output shrinking by 2.3%.

“Monetary policy can ease financial conditions and improve the resilience of households and firms to the short-term economic implications of Covid-19,” Kganyago said. “Our decision and its magnitude seeks to do this in the near term.”

While the move was bigger than any of the 21 economists surveyed by Bloomberg projected, analysts including independent economist Rian le Roux said the central bank could’ve done more.

“While it was the right thing to do, this is like putting a plaster on a gaping wound,” Le Roux said by phone. “Is that enough for the economy? No way.”

South Africa has had 150 confirmed cases of Covid-19, the most in sub-Saharan Africa, and the outbreak is gaining pace. The government has reacted by shutting schools and restricting travel, and banned gatherings of more than 100 people. It has also ordered restaurants and bars to close at 6 p.m., a decision that will put businesses at risk.

Kganyago said the central bank doesn’t see a need for unconventional policy tools at moment, but that he “won’t hesitate” to inject liquidity if needed.

The rate cut was “welcome but woefully short,” given that other countries have embarked on massive stimulus packages, Fani Titi, the chief executive officer of Investec Plc, said in an interview on CNBC Africa.

The prime rate, which commercial banks use as a peg to price loans, will decrease to 8.75%. The Congress of South African Trade Unions, the country’s biggest labor group and a critic of the central bank’s inflation-targeting focus, called for a 100 basis-point reduction before Thursday’s decision.

After the announcement, it said the Reserve Bank should push commercial banks to ensure that a significant portion of their credit go to priority sectors that drive growth and save jobs.

Inflation rose above the 4.5% midpoint of the central bank’s target range for the first time in 15 months in February, but it’s expected to moderate over the coming months on the back of a sharp decline in oil prices. Thursday’s cut won’t derail the efforts to anchor price growth at the midpoint, Deputy Governor Rashad Cassim said. The MPC revised its inflation forecast for the year to 3.8% from 4.7%

The central bank’s quarterly projection model indicated three repo rate cuts of 25 basis points each in the second and fourth quarter of 2020, as well as in the third quarter of 2021. The MPC brought all those reductions forward and added another, Kganyago said.

That means Thursday’s may be the last cut for now.

Even so, Nicky Weimar, chief economist at Nedbank Ltd. in Johannesburg, said there could be scope for further easing after the U.S. Federal Reserve reduced its main rate to near zero.

“The fact that the Fed has cut by 150 basis points gives the MPC at least 25 basis points of headroom to cut at its next meeting,” she said by phone.

What Bloomberg’s Economist Says

“Despite concerns related to rand weakness, a significantly lower inflation forecast created the space for monetary policy to respond to a rapid deterioration in economic conditions. We think the central bank is still too sanguine about economic prospects and will need to cut further this year.”

--Boingotlo Gasealahwe, Africa economist

-Click here to view the research

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