• Herman van Papendorp

Data dependent SARB cuts repo rate by 25 basis points to 3.5% - Momentum Investments


The South African Reserve Bank (Sarb) Monetary Policy Committee (MPC) reduced interest rates by 25 basis points to 3.5% at the scheduled July 2020 interest rate-setting meeting on benign inflation and fragile growth. This matched the view of 13 out of the 28 analysts surveyed by Reuters (including Momentum Investments’ view) and was similar to the view expressed by the forward-rate agreement (FRA) market.



Please see below highlights from the document prepared by the Momentum Investments Macro research desk. To download the full document in PDF, click here.


Highlights _________________________________________________________________________________



  • The South African Reserve Bank (Sarb) Monetary Policy Committee (MPC) reduced interest rates by 25 basis points to 3.5% at the scheduled July 2020 interest rate-setting meeting on benign inflation and fragile growth. This matched the view of 13 out of the 28 analysts surveyed by Reuters (including our own view) and was similar to the view expressed by the forward-rate agreement (FRA) market.

  • The Sarb’s growth forecast for the local economy weakened further to negative 7.3% for 2020 from negative 7.0%, factoring in continued pressure expected on investment, exports and jobs. The size of the forecasted negative output gap widened to 7.0% from 6.7% in 2020 and is expected to narrow to 2.8% in 2022, from 2.5% previously.

  • The Sarb’s headline inflation forecast remained unchanged at 3.4% in 2020 and dipped slightly from 4.4% to 4.3% for 2021. The Sarb sees risks to the inflation view as broadly balanced, given the upside threat of electricity prices and heightened fiscal risks balancing out muted currency pass-through and contained food inflation.

  • Interest rate preferences by the MPC members remained varied, with three members arguing for a cut of 25 basis points, whereas two members suggested a preference for keeping interest rates steady.

  • The Sarb has cut interest rates by 300 basis points since the start of the year and has utilised several instruments in its toolbox to encourage lending to firms and households and to improve liquidity in fixed income markets. We suspect the Sarb is nearing the end of its cutting cycle, with modest room for further monetary policy relief of 25 basis points given downside risks to its inflation forecasts. Despite paltry growth forecasted for this year and next and downward pressure from muted demand on inflation in the near term, the Sarb maintained a cautious view on longer term inflation expectations, suggesting that significant easing was less likely from here.

ENDS

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