Commentary from the Momentum Macro Research team following the interest rate cut.
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The South African Reserve Bank (Sarb) Monetary Policy Committee (MPC) reduced interest rates by an expected 50 basis points to 3.75% at the scheduled May 2020 interest rate-setting meeting.
The Sarb downgraded its expectation of growth in SA’s main trading partners due to the outbreak and spread of COVID-19 from negative 2.8% to negative 3.4% in 2020, but increased its growth assumption for 2021 from 4.0% to 4.3%.
The Sarb’s growth forecast for the local economy weakened further to negative 7.0% for 2020 from negative 6.1%, factoring in weaker demand for SA exports, as a consequence of disruptions to supply chains, suppressed global demand and decimated local confidence levels. The size of the forecasted negative output gap widened to 6.7% from 5.7% in 2020 and is expected to narrow to 2.5% in 2022, from 3.3% previously.
Low food inflation, slower wage growth, modest services inflation, a muted pass-through from the local currency and lower international oil prices led to a downward revision in the Sarb’s headline inflation forecast from 3.6% to 3.4% in 2020 and from 4.5% to 4.4% in 2021.
Interest rate preferences by the MPC members were aligned in the previous three meetings. This time around, three members favoured a 50-basis point cut in interest rates, while two members preferred a smaller cut of 25 basis points.
Unlike many developed market economies, higher interest rates in SA have provided the Sarb with the space for further monetary policy ammunition to shield the economy from the negative economic effects of COVID-19 and related financial market turbulence. In our view, the Sarb may be more inclined to temporarily cut real interest rates by more than usual to play its role in softening the blow of the virus shock on the local economy and we see further space for marginal easing to 3.25% by the end of the year.