Latest repo cut no surprise

123rf.com

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,” said Herman van Papendorp, head of investment research & asset allocation at Momentum Investments.

“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,” he said.

50 basis points would be better

Professor Raymond Parsons, economist at North West University, said a 50 basis points cut would have been better. “ With inflation now well within the Sarb’s target range, a case could have been made for 50 basis points cut at this juncture to further reduce borrowing costs for distressed businesses and households. Minimal borrowing costs are important for a survival strategy by firms and consumers under current stressful conditions.”

However, he said the cut was a welcome continuation of rate reductions since the beginning of the year and brings the repo rate to the lowest point since it was introduced in 1998. “Monetary policy is no magic wand, but the devastating impact of the Covid-19 lockdown on the SA economy means the MPC should err on the side of flexibility and rather do too much than too little.”

No magic wand

Luigi Marinus, portfolio manager at PPS Investments, said the governor highlighted the effect that the lockdown due to Covid-19 has caused on the expectation on GDP growth globally and in South Africa. The GDP growth expectation in South Africa was further lowered to a contraction of 7.3% in 2020, from the previous expectation of a contraction of 7.0% for the year. The expectations for 2021 and 2022 were both lowered by 0.1%, to 3.7% and 2.8% respectively.

“Even though the most recent inflation print was at 2.1% year-on-year, the forecasted inflation for 2020, 2021 and 2022 was only marginally lower at 3.4%, 4.3% and 4.3% respectively. These expectations were on the back of an increasing oil price averaging $40, $45 and $50 per barrel over the next three years.

“The action by the MPC in the midst of the Covid-19 pandemic has been decisive, but the governor has pointed out that monetary policy alone cannot provide all the stimulus needed for the economy to grow and function effectively again. This together with other policies and reforms will help to enhance the benefit to South Africans.”