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In a unanimous decision, the monetary policy committee of the Reserve Bank on Tuesday cut the rate at which it lends to commercial banks by another 100 basis points, bringing the repo rate to 4.25%.
This is the second 100-basis-point cut in two months, as the spread of the Covid-19 coronavirus pandemic continues to batter global markets and economies.
Market sell-offs have been deep and sharp, while recovery has been moderate and investor appetite for rand-denominated equities are expected to remain weak.
“The Covid-19 outbreak will have a major health and social impact, and forecasting domestic economic activity presents unprecedented uncertainty. With that in mind, the bank expects GDP to contract by 6.1% in 2020, compared with the -0.2% expected just three weeks ago. GDP is expected to grow by 2.2% in 2021 and by 2.7% in 2022,” Reserve Bank governor Lesetja Kganyago said.
The extension of the lockdown to the end of April will reduce growth even further. As businesses remain shut, economic activity is muted and households spend less.
“The faster the global economy recovers from the crisis, as China appears to be gradually doing now, the more positive growth spillovers will strengthen for South Africa, including healthy price levels for commodity exports,” Kganyago said.
Weak oil prices, weak demand for commodities and a volatile currency are all factors driving growth contraction. While the inflationary outlook still falls within the bank’s target range, “global economic and financial conditions are expected to remain highly volatile for the foreseeable future.
“The implied path of policy rates over the forecast period generated by the quarterly projection model indicates five repo rate cuts of 25 basis points extending into the first quarter of 2021,” Kganyago said.
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