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Oil crash could speed up rate cuts in South Africa

Mar 10 2020 07:05
Londiwe Buthelezi and Carin Smith

The odds are increasingly stacked in favour of more interest rate cuts this year as the coronavirus outbreak and oil price crash may force central banks around the world to ease their monetary policies, economists say. 

The MPC which is chaired by the Reserve Bank Governor, Lesetja Kganyago is due to meet from the 17th to the 19th of March 2020 and to announce its rate review decision on the last day. The meeting also comes few days ahead of Moody’s review of SA’s credit rating on 27th March.

The MPC surprised some analysts in January when it cut South Africa’s repo rate to 6.25%, its lowest point since December 2015.

In his statement then, Kganyago said the committee expected GDP for the fourth quarter of 2019 to show "some positive growth".  But that was not the case as the country slipped into a technical recession when the economy shrank by 1.4% in the fourth quarter of 2019.  GDP had contracted by 0.8% in the third quarter and for 2019, it grew by only 0.2% in real terms.

South Africa’s growth prospects have been worsened by the impact of the coronavirus on different industries and implications of the oil price crash which caused bloodbath in the local stocks and the rand to plummet to the lowest level seen in 2016.

READ | Bloodbath on the JSE as markets plunge around the world

Siphamandla Mkhwanazi, senior economist at FNB said the MPC will, directly or indirectly, take these shocks into consideration.

“The advent of COVID19 and now oil price shocks enhances our baseline view of two further rate cuts this year,” he said.

Mkhwanazi said if other central banks cut their interest rates in response to the coronavirus outbreak, and if on the home front our domestic inflation is contained, this will allow the SARB space for further rate cuts. In the US, the Federal Reserve has already slashed its key interest rate by 50 basis points to near-zero, its biggest one-time move since 2008.

Maarten Ackerman, chief economist and advisory partner at Citadel, also points out that the SARB is "running behind the curve" with monetary policy in South Africa still quite tight.

"Most central banks have been cutting interest rates quite aggressively – we even saw a surprise Federal Reserve 50 basis point cut on Tuesday evening – so globally they have paved the way for further cuts," comments Ackerman.

"We don't see any runaway inflation, while inflationary pressure in the economy is low and we have a lack of demand. This is a perfect environment in which to cut interest rates."

He adds that, although SA is in an environment where a rate cut is not going to kick start the economy, it would definitely be a stimulatory that could assist consumers who are under pressure.

"The fact that the budget contained tax relief will also contribute to a better year for consumers. Given that SA has one of the highest real yields in the world, if the SARB is brave enough, it could afford a 100-basis point rate cut which would really start to make a difference," says Ackerman.

"Such a move would help to build consumer confidence and would provide relief for those who are indebted and thus support consumption going forward."

However, in his view, the likelihood of this is limited given the SARB's "conservative nature". It has cut rates by a mere 25 bps at previous monetary policy committee meetings, which, according to Ackerman, is simply insufficient to kickstart the SA economy.

"The environment is certainly right for a rate cut, but I am not convinced that the SARB will prove to be as aggressive as it needs to be in the current circumstances," he concludes.

Adam Phillips of Umkhulu Treasury believes that the SARB can't afford to be as "aggressive" as the US Federal Reserve.

"It is clear that cutting rates in the US has not helped stabilise the markets yet. We still have to see what the ECB will do on Thursday," says Phillips.

Investec expects first cut in May

Investec’s chief economist, Annabel Bishop says while a 25 basis points in March is possible if the coronavirus fallout intensifies, she does not think it is likely to happen as Kganyago indicated last week that inflation has not fallen much and that South Africa first needs to reduce the impact of country risk to make room for more interest rate cuts.

“A looming downgrade from Moody’s, given that SA is already on a negative outlook has raised SA’s country risk. Consequently, we do not believe a March interest rate cut is likely, although it is possible.”

But Bishop now expects a 25 basis points cut in the repo rate at the May MPC meeting. Like Mkhwanazi, she also believes that if more central banks globally lower their interest rates to try and spur economic growth as the IMF and Moody’s has revised global economic growth downward, South Africa could also to look to ease its repo rate further.

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