Charts Show South African Central Bank ‘U-Turn’ Due to Virus

(Bloomberg) -- The economic fallout of the coronavirus pandemic has turned South Africa’s typically hawkish monetary policy committee into doves.

The five-member panel, headed by Governor Lesetja Kganyago, has cut the nation’s benchmark interest rate by more than a third this year and is expected to ease policy further on Thursday in a bid to support an economy that could contract by as much 16.1% due to the virus and restrictions to curb its spread.

Another reduction in the rate would be “quite a U-turn” in the stance of a committee that often cited concerns about a weak currency and its possible secondary impact on inflation as barriers to easing, said Elize Kruger, an independent economist. The rand has lost almost a quarter of its value against the dollar this year.

“There is definitely a difference in the way they look at the current set of circumstances,” she said. “It has completely changed the approach. And rightly so, because if we’re not going to try and save this economy, what will we have left over?”

These charts show how the committee’s stance has evolved:

Charts Show South African Central Bank ‘U-Turn’ Due to Virus

Less than a month after its biggest cut in more than a decade, the central bank reduced the repurchase rate by another 100 basis points to 4.25% at an unscheduled meeting in April. That’s the lowest since the rate was introduced in 1998 and marked the first time since the global financial crisis that the MPC moved lower at three consecutive meetings. All but one of the 20 economists in a Bloomberg survey predict another cut Thursday, and the median estimate is 50 basis points of easing.

Charts Show South African Central Bank ‘U-Turn’ Due to Virus

While the MPC has a track record of being cautious when easing and has repeatedly said that monetary policy alone can’t help an economy that slumped into a recession even before the virus was detected in South Africa, all five members of the panel voted to cut the key rate at every one of its meetings this year.

Charts Show South African Central Bank ‘U-Turn’ Due to Virus

Inflation that is forecast to remain at or below the preferred 4.5% midpoint of the target range on average until 2021 should give the central bank room to respond to the turmoil caused by the virus. However, there may be concerns about price-growth calculations which could stay the MPC’s hand, according to Jannie Rossouw, an economics professor and head of economic and business sciences at the University of the Witwatersrand. That’s after South Africa implemented one of the world’s most severe lockdowns, which shut most businesses and permits the sale of only essential goods such as food and medicines as well limited items of clothing.

The statistics office is due to publish inflation data for April -- the first full month of restrictions -- only next week as the virus delayed many of its regular releases. It will use data from retailers’ websites for 170 goods that comprise the 412-item inflation basket alongside non-monthly price surveys and imputations for products such as alcoholic beverages and tobacco that weren’t legally available for sale during the lockdown, said Patrick Kelly, the agency’s chief director for price statistics.

What Bloomberg’s Economist Says...

“I don’t think there is anything unusual about the SARB’s response. I think it is appropriate for a crisis. In 2009, they cut rates by 450bps -- 4x100bps plus one 50bps cut. The contraction we are looking at now is even steeper, more than 5% vs 1.5% in 2009. So if anything the response is still relatively tame, especially if you look at the level of the real rate. The low inflation environment, compared to 2009, and also lower inflation expectations, give the SARB more scope to act in our view.”

-- Boingotlo Gasealahwe, Africa Economist

©2020 Bloomberg L.P.

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