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Has The SA Reserve Bank Run Out OF Ammunition?

The SARB is expected to hold the repo rate next week, despite over a third (36%) of economists on Finder’s repo rate panel calling for a rate cut. 

Nine of the eleven panellists (82%) are forecasting a hold and just two (18%) – economist at Rand Merchant Bank, Mpho Molopyane, and professor of economics at the University of Western Cape, Matthew Ocran – a decrease. 

Both panellists are forecasting a rate decrease of 25bps given the weak 2Q20 GDP economic data. Molopyane expects the Bank to revise its -7.3% GDP growth outlook for 2020 to reflect a deeper contraction and as a result believes it will cut the rate.

Meanwhile Ocran said the figures showed an “economy in a self-induced coma with little prospect of recovery in the next 12 months, at least”.

Both Chief economist at BER, Hugo Pienaar, and director and head of Capital Markets Research at Intellidex, Peter Attard Montalto, are in favour of a rate cut, despite forecasting a hold. Pienaar thinks the Bank should drop the rate by 25bps and Montalto 50bps.

Montalto says the MPC should provide as much stimulus as possible given the 500bn stimulus package has largely failed to live up to its headline size.

…as such the MPC should provide as much stimulus as it can get away with in a least regret policy move that would see rates more negative for slightly longer and also see a crystallisation of the skew in risks from here of inflation to the downside,” he said.

That said the MPC is viewing things as needing more stability for longer and a more balanced profile in inflation risks and hence is likely to keep rates unchanged albeit it will be a close call.

When asked if the July consumer inflation increase to 3.2% in July could be a deterrent for future rate cuts, the majority of panellists (55%) said no, while 36% said yes and one panellist said they were unsure. 

Senior lecturer in banking and finance at the University of the Free State, Dr Johan Coetzee is part of the 36% who say it will encourage the MPC to hold. He thinks that as long as the SARB centres the inflation target in its decision-making, it won’t consider further rate cuts. 

Having said this, although the latter part of their mandate ‘in the interest of balanced and sustainable economic growth in South Africa’ may take precedence during these unprecedented times, my view is that accommodation, if any, will not be substantial going forward,” he said. 

Even if the rate does decrease it may not be that effective, according to 36% panellists who say the rate has reached its effective lower bound. 

The repo rate cannot be used in isolation in an attempt to get South Africa out of its low-growth trajectory. Many more policy changes are necessary, for instance less regulation,” said Interim head: Wits Business School at University of the Witwatersrand Jannie Rossouw.

However even if the effectiveness of future rate cuts is uncertain, some panellists do think there’s scope for the benefits of earlier rate cuts to be passed on more fully to consumers. Over a quarter of panellists (27%) said they did not think the 300bps easing throughout the year had been adequately passed onto consumers, while 64% said they had and 9% said they were unsure.

The report also reveals consumers may not have the benefit of rock bottom rates for long. The panel suggested that the interest rate may increase in little over a year. 64% of the panel think the repo rate will increase in the second half of 2021, 9% the first half of 2022 and 27% the second half of 2022.

You can find the full report with additional commentary here: