AA - 2020

Author: Siphelele Dludia
18 September 2020

Further repo rate cut mooted at next MPD

JOHANNESBURG – The South African Reserve Bank on Thursday left the door open for a final rate cut before Christmas after two members of the Monetary Policy Committee (MPC) voted in favour of a 25 basis point rates cut.

The central bank’s Governor Lesetja Kganyago said that the MPC was not unanimous on the decision to maintain the repo rate, but signalled that the rates easing cycle could be coming to an end.

Kganyago said South Africans should expect an upward review of the rates regime in the third and fourth quarters of 2021.

He said the repo rate projection from the Quarterly Projection Model remained a broad policy guide, changing from meeting to meeting in response to new data and risk.

“In this highly uncertain environment, future decisions will continue to be data dependent and sensitive to the balance of risks to the outlook,” Kganyago said.

“The MPC will seek to look through temporary price shocks and focus on second-round effects.”

The Reserve Bank kept the repo rate on hold at 3.5 percent with three members of the MPC voted in favour of maintaining the current level of interest rates.

It kept the lending rate at 7 percent.

The MPC, which has cut rates by a collective 300 basis points since January, will have its final meeting for the year in November.

Kganyago said the bank now forecast a gross domestic product (GDP) contraction of 8.2 percent in 2020, compared to the 7.3 percent contraction forecast in July.

He said the country’s GDP was now projected to grow by 3.9 percent in 2021 and by 2.6 percent in 2022, adding that there would be an 8.2 percent economic contraction in 2020, compared to the 7.3 percent contraction forecast in July.


North West Business School’s Professor Raymond Parsons said the decision to leave the repo rate unchanged in present economic circumstances was disappointing, as the economic outlook was now even bleaker.

“Not to cut interest rates further now is therefore not a helpful or responsive judgement call,” Parsons said.

“Both global factors and the shock second quarter collapse in GDP growth had created both the need and space for more support from monetary policy, albeit modest.”

Kganyago said that inflation was expected to remain contained below the midpoint of the target range for this year.

He said the headline consumer price inflation forecast was expected to average 3.3 percent this year – lower than previously forecast – and at 4 percent in 2021 and 4.4 percent for 2022.

Momentum Investments economist Sanisha Packirisamy said that the central bank could consider interest rate hikes in the second half of 2021.

“We suspect the SARB is at the end of its cutting cycle,” Packirisamy said.

“The SARB highlighted ongoing fiscal concerns, hinting that additional easing was less likely from here, unless, in our view, we suffer another growth setback or experience another sharp dip in inflation.”

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