Thought May 22, 2020 / 08:09 am UTC

SARB: Enthusiasm for Rate Cuts Starts to Wane

By Francesca Beausang

After 100-bp rate cuts at its past two meetings, the South African Reserve Bank (SARB) only cut by 50bps to 3.75%. It was also the first meeting this year where the Monetary Policy Council was divided, with two members favoring -25 bps. Hence, we only see another 50 bps in cuts this year.

Just like the Central Bank of the Republic of Turkey signaled a more measured pace of rate cuts ahead at its interest rate meeting on Thursday, the SARB seems to have rediscovered its inner hawk. Whether this is the right course of action is a different matter. 

Indeed, it cut its 2020 growth forecast to -7% from -6.1%, while reducing its 2020 inflation forecast to 3.4% from 3.6%, which gives it ample justification for sustained and decisive easing. It also noted that it was unconcerned about the inflation pass-through of a weaker ZAR, which has been a major inflationary concern in the past. 

So what stands between the SARB and more consequent easing? For one thing, it is satisfied with the monetary easing provided by its government bond purchase program (though we cannot call it quantitative easing), with ZAR 11 billion bought by the SARB in April. Also, the MPC noted that South African real rates will be negative until the end of 2021, reaching -0.6% in Q2 2021, which it has not emphasised before. 

Finally, the SARB might also be concerned that inflation pressures could increase from year-end beyond its expectations, especially as the data are unreliable at the moment, which is why April CPI will be delayed to June 24. There is considerable uncertainty about the possibility of a great reflation in 2021 globally and given the SARB’s hawkish bent, this is clearly something that will encourage it to exercise restraint in further easing. 

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I, Francesca Beausang, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.