Rate cut on the cards for strained consumers
Another reduction by the Reserve Bank next week would make it the fourth consecutive cut this year
The SA Reserve Bank could cut interest rates by as much as 100 basis points again next week, according to economists, bringing a glimmer of relief to SA’s consumers and households, many of whom face shrinking incomes and an uncertain financial future due to the coronavirus crisis.
Eight in 10 local economists surveyed by consumer comparison website Finder believe the Bank will cut interest rates at its meeting next week. Though views on the level of the cut vary between 25 basis points (bps) and 100 bps, the average forecast is for a cut of 50 bps.
This would make it the fourth cut the Bank has made so far this year after its last unscheduled meeting of the monetary policy committee (MPC) in April took the benchmark interest rate to 4.25%, its lowest since it was introduced in 1998.
The combination of little inflation and a historic decline in economic growth provides sufficient room for the Bank to remain aggressive, the Bureau for Economic Research’s chief economist, Hugo Pienaar, said in response to the survey. Pienaar said headline inflation is likely to dip below the lower boundary of the Bank’s target range of 3%-6%.
Both Standard Bank and BNP Paribas also think it is likely that the Bank will undershoot its inflation target in the coming months, given weak domestic demand and the recent collapse in oil prices, which have been feeding into SA fuel prices.
Johann Els, chief economist at Old Mutual Investment Group, told Business Day that the current environment called for a further 100 bps cut. “These are extraordinary circumstances, we require extraordinary measures,” Els said.
The Bank is also expected to revise its growth forecasts for 2020, having already slashed its expectations at the last MPC to -6%.
“Given the deterioration in the economic outlook since the last monetary policy meeting — where it was conceivable that the easing of lockdown regulations would be much more accommodative from May 1 — the [Bank] will definitely revise its economic growth forecast to show a deeper recession this year,” PwC economists Lullu Krugel and Christie Viljoen said in a note. PwC is forecasting a cut of 50 bps.
On Wednesday evening President Cyril Ramaphosa announced that the country would move to level 3 of lockdown at the end of May except for those areas where coronavirus infections are highest.
Though SA has been on level 4 lockdown restrictions since May 1, the gradual easing of restrictions may have come too late for businesses.
PwC said SA’s economy could contract by as much as 13% this year, “based on the current risk-adjusted approach communicated by government”.
Further cuts will be a boon to consumers and households, which are showing signs of financial stress. Though official data has yet to reflect this, recent surveys by private companies suggest SA’s households are beginning to take strain after nearly seven weeks in lockdown.
A survey conducted by AllTold Research, covering 1,500 people living in households with a gross monthly income of more than R8,000, revealed that 56% of participants had lost earnings during the first six weeks of lockdown. About 13% of participants said they have already run out of cash reserves, while a further 19% say they are running out of reserves.
This chimes with the findings of a survey of more than 1,900 participants, done by personal finance site Just Money, which showed that more than 73% of respondents have had their family earnings “significantly” or “very significantly” affected by the Covid-19 fallout.