The SA Reserve Bank, Pretoria. File Picture: FINANCIAL MAIL
The SA Reserve Bank, Pretoria. File Picture: FINANCIAL MAIL

In some ways, the choice facing the Reserve Bank seems simple enough — and that would have been supported by data on Tuesday reinforcing how dire the country’s economic position is.

The Bank’s leading indicator has been on such a long downward trend that is has stopped being newsworthy. If anything, it highlights that SA’s economic decline long preceded the Covid-19 pandemic.

The Bureau for Economic Research data showing that confidence in the services sector slumped to a record low in the first quarter was also not a big shock, given the nationwide lockdown. In the short to medium term, there’s virtually no chance of the economy being overrun by an explosion in consumer demand.

SA’s hard-hit workers, enduring retrenchments and pay cuts, aren’t going to be the source of inflation, which, in May, slowed to 2.1% — the first time it had breached the lower end of the 3% to 6% range since 2005. While many make the mistake of looking at historical data then pronounce on what the Bank will do, forward-looking indicators point to a depressed economy and non-existent demand-side inflationary pressure.

An economy that’s set to shrink by about 10% based on most private-sector forecasts would seem to make a case for another aggressive rate cut. There is a parallel debate about the use of non-conventional policy measures, such as quantitative easing, though this is more about politics than economics and will not even be entertained by the monetary policy committee (MPC).

On conventional policy, it’s easy to make the case for a cut and the only surprise is that so many economists are in doubt that it will come. In fact, the majority, seven out of 16, in a Bloomberg survey expect the repo rate to stay at 3.75% when the MPC completes its meeting on Thursday. The median is for a cut to 3.50%, while just four expect it to match the 50-basis point (bps) cut from May, which would take the rate to 3.25%.

The global outlook would also seem to cement the case for looser policy. Real rates in the US, based on the differential between 10-year bond yields and inflation, are negative, indicating that investors are not convinced by the sporadic surges in risk appetite whenever there’s a positive headline about a Covid-19 vaccine.

If the Bank was worried about rates differentials and the potential for further rand weakness, it doesn’t seem like there’s any chance of policy-tightening among SA’s major partners any time soon. Even if that wasn’t the case, the collapse in economic activity and demand for exports mean there’s little chance of a feed through from currency weakness to inflation.

With the economic devastation facing SA, it would be sensible for the Bank to err on the side of doing too much rather than too little. The arguments against a cut are not overly convincing.

It’s true that the central bank should get credit for being proactive so far, having reduced the repo rate by 250bps in the wake of Covid-19, and that much of this is yet to feed into an economy that was in almost complete lockdown until recently, only moving to level 3 at the start of June.

Economists at PwC point out the cumulative 275bps cuts for 2020 compare to a median of 100bps for emerging markets, so Bank governor Lesetja Kganyago and the rest of the MPC can’t be accused of having been asleep at the wheel.

But then SA was sicker than most even before Covid-19 and perhaps it needs a stronger dose of medicine. With its sophisticated models, it’s unlikely that actual data between now and the next meeting in September will tell policymakers anything they don’t already know, so there’s little reason for waiting.

The likelihood is that the Bank’s updated inflation and GDP forecasts will strengthen the case for a move now, and it should use them to provide more badly needed relief to businesses and households.

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