Case builds for deeper rates cuts by Reserve Bank, say economists
As growth and inflation expectations slide amid the coronavirus pandemic, all eyes are on the Reserve Bank’s MPC
As SA’s economy reels from the effects of the coronavirus, Thursday’s decision from the SA Reserve Bank will be closely watched for any rays of light an interest-rate cut could throw the way of consumers and businesses.
Though finance minister Tito Mboweni warned on Monday that the Bank cannot “solve the world’s problems”, economists argue that there is a growing case for a 50 basis-point (bps) rate cut despite the damage done to the currency as a result of coronavirus chaos.
Even before the virus set in, there was sufficient room for a 25bps cut in interest rates in March, said Citibank economist Gina Schoeman.
SA went into a technical recession in the fourth quarter of 2019, while inflation forecasts for 2020 have moderated to levels well below what the Reserve Bank was forecasting at its last meeting in January, said Schoeman. Citibank is expecting a 50bps cut on Thursday.
At the last meetings of the monetary policy committee (MPC) the Bank cut rates by 25bps due to much weaker expectations for growth and inflation.
The Bank revised down its inflation forecasts to 4.7% for 2020, 4.6% for 2021 and 4.5% for 2022, while on the growth side it revised its estimates down to 1.2% in 2020, 1.6% in 2021 and 1.9% in 2022.
After the coronavirus set in, growth forecasts soured further. Citibank is now expecting a contraction of 0.4% this year, said Schoeman.
At the same time, oil prices have fallen dramatically after an oil cartel Opec supply agreement collapsed as worry about oil demand intensified, which is expected to feed into lower inflation in the coming months.
Though the Bank will be concerned about a depreciating currency — which, at the close on Tuesday, was trading in the region of R16.57 to the dollar — its mandate is to focus on inflation said Schoeman. “We are in a world now where there is zero pass-through for SA as far as we can see it.”
Moody’s good mood
The threat still exists that Moody’s Investors Services — the last credit ratings agency to rate SA debt at investment grade — could cut SA to junk status at its scheduled review of SA the week after the MPC. But in a recent commentary on SA, Moody’s explicitly noted that SA’s “real interest rates remain high, constraining the pace of real economic activity”.
If the Bank takes steps to cut, said Schoeman, this may be enough to stay Moody’s hand under the current circumstances.
PwC economists Lullu Krugel and Christie Viljoen said in a note that there is “an urgent enough situation to warrant an interest-rate cut of 50bps”. Though lower interest rates are not the answer to long-term growth, “significant monetary policy easing” combined with faster implementation of economic reforms would give SA a much-needed boost with “no risk to the inflation outlook”, they said
According to Stanlib chief economist Kevin Lings if the rand continues to trade at current levels and oil prices remain low, SA could see a R2 cut in petrol prices in April. This could reduce SA’s consumer inflation in April to about 3.5% year on year, he argued.
The focus on the MPC meeting also comes as the government is also developing a package of measures aimed at helping support the economy — though it has yet to outline the details.
Lings said the combination of fiscal support, a lower interest rate, and a cut in the petrol price would provide “many economic participants with some meaningful [relief]”.