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More S. Africa Rate Cuts Now Hinge On Forecast for Economy

Further South Africa Rate Cuts Now Hinge On Forecast for Economy

Further interest-rate cuts in South Africa may now depend on how deep the central bank sees the economy contracting.

Since the monetary policy committee’s July meeting, where it used an estimate of a 40.1% annualized contraction in gross domestic product for the second quarter, subsequent key economic data suggested a deep slump in the period as a nationwide lockdown aimed at curbing the spread of the virus limited output.

At 3.2% in July, the inflation rate jumped more than expected and moved back into the central bank’s target range. While that confirmed the MPC’s expectation that the drop below 3% would be temporary, Governor Lesetja Kganyago said last week that the rate of price growth is not a concern for the MPC for the next 12 to 18 months, and that gives room to respond if the nature of the shock caused by the pandemic turns out to be worse than forecast.

More S. Africa Rate Cuts Now Hinge On Forecast for Economy

“What is critical for the next move will be outcome of the second-quarter GDP number,” Elize Kruger, an independent economist, said by phone. A big quarterly decline in output that would lead the central bank to cut its estimate for a 7.3% contraction in 2020 and revise down its forecasts through 2022 would open up a “small window” for further easing, she said.

The projected contraction for the three months through June would be the deepest quarterly decline since at least 1990. The statistics office is scheduled to publish second-quarter GDP data on Sept. 8, a week before the MPC sits down for its deliberations, where it will also consider revisions to its growth forecasts.

The median estimate of 29 economists in a Bloomberg survey is for an 8% contraction in GDP this year.

SURVEY REPORT: South Africa Economic Forecasts in August 2020

Reluctant Cutters

Even if the central bank lowers its estimates, that doesn’t guarantee a cut in the key rate, said Gina Schoeman, an economist at Citibank South Africa. The MPC could opt to treat it as hindsight data and if the second-quarter GDP print is worse than the bank expects, its model would point to a greater quarterly recovery for the three months through September, she said.

In July, the central bank’s estimate was that the economy would bounce back to a 17.5% annualized gain in the third quarter.

South African Central Bank Forecasts a V-Shaped Recovery: Chart

“They are reluctant rate cutters,” Schoeman said. “They were fine to cut during the crisis but if they’re going to cut again, they’re going to be compelled to do so by the data, and the data so far doesn’t suggest that is happening soon.”

More S. Africa Rate Cuts Now Hinge On Forecast for Economy

The central bank has reduced the benchmark interest rate by 300 basis points this year, taking it to the lowest level since it was introduced in 1998. At the July meeting, where the MPC cut by 25 basis points, two of the five panel members favored an unchanged stance, which was the first time in 2020 that some policy makers preferred to hold.

The bank will consider the balance of risks to its inflation outlook, real interest trajectory and fiscal consolidation efforts at its next MPC meeting, said Sanisha Packirisamy, an economist at Momentum Investments.

What Bloomberg’s Economist Says...

“A further downward revision in the SARB’s growth and inflation outlook should create room for a 25 basis-point cut. Though the SARB could hold and wait for more data before acting at the November meeting”

-- Boingotlo Gasealahwe, Africa Economist

©2020 Bloomberg L.P.