The South African Reserve Bank has announced a further 50 basis point cut to the repo rate as the fallout from the coronavirus continues to affect the country’s economy. This takes the repo rate to a 50-year low, from 4.25% to 3.75%.
With the latest cut, the Reserve Bank has so far cut the repo rate by 250 basis points this year. The first cut, in March, was by 100 basis points, and this was followed in April with another 100 basis point cut during an emergency meeting of the Monetary Policy Committee (MPC) meeting in the wake of the pandemic.
Since the MPC’s April meeting, the country’s economy has further deteriorated on the back of an extension of the lockdown and depressed economic activity. In a worst-case scenario the treasury estimates that the unemployment rate could surpass 50%, leaving more than seven million people in the country unemployed.
The Reserve Bank has forecast that the economy could contract 7% in 2020, revised from the 6.1% decline it had forecast in April.
In a media briefing on Thursday, Reserve Bank governor Lesetja Kganyago said even if the lockdown is eased in the coming months and more economic activity resumes, the Bank expects gross domestic product to grow only slightly in the next couple of years, by 3.8% in 2021 and 2.9% in 2022.
Easing the lockdown in the coming months is expected to help the economy’s recovery only in the short term, Kganyago said.
“Even as the lockdown is relaxed in coming months, for the year as a whole, investment, exports and imports are expected to decline sharply. Job losses are also expected to be widespread,” he said.
Kganyago said the uncertainty of the pandemic presents challenges for the Bank in terms of accurately collecting the country’s economic statistics. Economic data points, however, indicate a worsening environment. For example, the rand has depreciated 22.9% against the dollar since January, and 0.7% since the April meeting of the MPC.
“These [are] uncertain times and these uncertain times are actually making economic forecasting very tricky … There are whole industries that have been shut down. How do you assess at what price they are going to sell? So we are going to have to wait for Stats SA [Statistics South Africa] when they come out with figures,” he said.
Kganyago said that current debates about whether the economic recovery will be U-shaped (the economy experiences a sharp decline, followed by a prolonged period of stagnation, then rises back to its previous peak) or V-shaped (then economy sharply declines then sharply rises back to its previous peak) are useful because of the uncertainty of the pandemic.
“What we do know that there has been a significant slowdown or contraction as a result of the supply-and-demand shock that we have seen from Covid-19 … I cannot say what shape the recovery will be, suffice to say that there will be a recovery next year,” Kganyago said.
To cushion the economy against the economic fallout of the coronavirus, the Reserve Bank has introduced measures to increase liquidity in the market, including buying government bonds in the secondary market. Overall, the Bank’s interventions that far are expected to inject R300-billion into the economy.
Kganagyo said the interventions have also added to the stabilisation of the market, with investors increasing their purchase of long-term bonds, “helping to ease yields in recent days. However, he noted that “the yield curve remains exceptionally steep”.
The Reserve Bank has been criticised for not using all the “bazookas” in its arsenal to support the economy during the pandemic, including the introduction of quantitative easing which would see more money being printed in a bid to stimulate the economy. Kganyago defended the Bank’s measures so far, saying that it has continued to act within its mandate of ensuring that there is a proper functioning of the market.
“Monetary policy, however, cannot on its own improve the potential growth rate of the economy or reduce fiscal risks. These should be addressed by implementing prudent macroeconomic policies and structural reforms that lower costs generally, and increase investment opportunities, potential growth and job creation,” he said.