Analysts say that if the corona-induced economic crisis persists into the second half of the year, more rates cuts are likely. Picture: AFP/PHILIP FONG
Analysts say that if the corona-induced economic crisis persists into the second half of the year, more rates cuts are likely. Picture: AFP/PHILIP FONG

As the world continues to digest the economic and financial ramifications of coronavirus this week, local attention is likely to zero in on the SA Reserve Bank’s interest rate decision on Thursday.

Though it comes after a series of other data releases earlier in the week, starting with consumer confidence figures on Monday, governor Lesetja Kganyago and his monetary policy committee (MPC) will make the call amid a pressure cooker of events that has dramatically changed expectations of how 2020 will progress.

At January’s meeting, when it cut rates by 25 basis points, the Bank sharply revised down both its growth and inflation forecasts for the year. Yet even these revisions, argue economists, now look optimistic.

The inflation forecast generated by the Bank’s quarterly projection model (QPM) was for inflation to average 4.7% for 2020, 4.6% for 2021 and 4.5% for 2022. On the growth side it revised growth down to 1.2% in 2020, 1.6% in 2021 and 1.9% in 2022.

Since then, SA has delivered an uninspiring budget, with even lower forecasts for growth from National Treasury — peppered with warnings of an economic contraction this year, if global growth and domestic conditions deteriorate. Which they subsequently have.

Locally, load-shedding, after a brief respite, has intensified, and Stats SA confirmed the economy slid into a recession in the last quarter of 2019.

On the global front oil prices fell after an Opec supply agreement collapsed as fears about demand for the commodity in the wake of the virus intensified.

The dramatic spread of Covid-19, including to SA, has seen world growth expectations slashed by the likes of the OECD, as well as Moody’s Investors Services. The ratings agency is due to decide whether SA’s last investment grade credit rating should be cut to junk, on March 27. Amid the coronavirus panic the rand has been hammered, plummeting to well above the R16/$ mark, and the JSE has lost trillions.

The consensus view of a Bloomberg survey is for a rate cut of 25 basis points. But it will be a “very close call on interest rates”, warned Annabel Bishop, Investec chief economist, in an MPC preview.  

Global risk sentiment has “deteriorated materially”, and “the risk of a Moody’s downgrade at the end of the month could scupper the chance of this rate cut, given that it could push the domestic currency towards R18 [to the dollar] if the current severe risk-off environment in global financial markets persists”, Bishop said.

Though a downgrade has been priced in by markets, “risk aversion is so elevated currently that the rand could still see further marked weakness,” she said. In this climate, “the financial market reaction is likely to be pronounced, and not merely an immaterial knee-jerk reaction”, said Bishop.

Others however believe that the hit to oil — expected to feed into lower inflation for SA — is likely to outweigh the weaker rand.

According to Nedbank, the “implosion” of global oil prices “and the virus-induced shock to a domestic economy already in technical recession are expected to outweigh the impact of the ... slide in the rand”.

Given the more subdued inflation outlook, the threat to the domestic economy and renewed monetary policy easing by other central banks, the SARB is likely to cut, argued Nedbank.

“If the corona-induced economic crisis persists into the second half of the year, more cuts are on the table. If not, the MPC is likely to keep interest rates on hold at lower levels,” it added.

On Wednesday consumer price inflation  for February is released by Stats SA. A Bloomberg survey forecasts inflation will remain at January’s level of 4.5% —  the midpoint of the Bank’s target range of between 3% and 6%.

According to independent economist Elize Kruger, CPI could come in slightly higher as February is the month medical aid premiums and doctors fees are reported. But she flagged that more fuel-price declines are expected for April and possibly May, and argued that the SARB will need to reduce both its growth and inflation forecasts.

Retail sales figures for January are also due out on Wednesday. Sales contracted in December rounding off a tough year for retailers worsened by the start of load-shedding.

“We expect the January 2020 reading to reflect another dismal print, particularly against the backdrop of relatively low disposable income growth and front-loaded expenditure amid Black Friday sales and festive season shopping,” said FNB’s economics unit in a note.

The week opens with the FNB/BER consumer confidence figures for the first quarter of 2020. For the last two quarters of 2019, the index sat at -7, its lowest level since 2017.

Confidence is unlikely to have recovered, amid load-shedding, a weak labour market and slower real income growth, said Investec’s Kamilla Kaplan.

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