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environment|financial|projects|services

SARB cuts interest rate to six-year low to tackle virus fallout

SARB governor Lesetja Kganyago

SARB governor Lesetja Kganyago

Photo by Bloomberg

19th March 2020

By: Bloomberg

  

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The South African Reserve Bank cut its benchmark interest rate by the biggest margin in more than ten years as it seeks to support an already fragile economy that’s expected be hit hard by the novel coronavirus.

The monetary policy committee voted to lower the repurchase rate to 5.25% from 6.25%, governor Lesetja Kganyago said Thursday in the capital, Pretoria. The decision by the five MPC members was unanimous. That’s more than any of the 21 economists surveyed by Bloomberg projected.

The MPC now projects the economy will contract by 0.2% this year compared with a forecast of 1.2% growth given in January. It sees expansion reaching 1.6% by 2022.

“Monetary policy can ease financial conditions and improve the resilience of households and firms to the short-term economic implications of Covid-19,” Kganyago said. “Our decision and its magnitude seeks to do this in the near term.”

Inflation rose above the 4.5% midpoint of the central bank’s target range for the first time in 15 months in February, but it’s expected to moderate over the coming months on the back of a sharp decline in oil prices. Thursday’s cut won’t derail the efforts to anchor price growth at the midpoint, Deputy Governor Rashad Cassim said. The MPC revised its inflation forecast for the year to 3.8% from 4.7%.

“We are definitely not in an inflationary environment,” Maarten Ackerman, chief economist at Citadel Investment Services, said by phone. “We are probably heading toward deflation.”

The central bank’s quarterly projection model indicated three repo rate cuts of 25 basis points each in the second and fourth quarter of 2020, as well as in the third quarter of 2021. The MPC brought all those reductions forward and added another, Kganyago said. That means Thursday’s may be the last cut for now.

Even so, Nicky Weimar, chief economist at Nedbank in Johannesburg, said there could be scope for further easing after the US Federal Reserve reduced its main rate to near zero.

“The fact that the Fed has cut by 150 basis points gives the MPC at least 25 basis points of headroom to cut at its next meeting,” she said by phone.

Edited by Bloomberg

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