End of South Africa’s easing cycle approaching - Capital Economics
Africa Economics

End of South Africa’s easing cycle approaching

Africa Economics Update
Written by Virag Forizs

South African policymakers continued to cut interest rates today, taking the repo rate down by 50bp to 3.75%, but the end of the easing cycle appears to be on the horizon. At this stage, we expect one more cut, of 25bp, to 3.50%. With the eventual recovery likely to be extremely weak, monetary conditions will remain loose for longer than most seem to think.

  • South African policymakers continued to cut interest rates today, taking the repo rate down by 50bp to 3.75%, but the end of the easing cycle appears to be on the horizon. At this stage, we expect one more cut, of 25bp, to 3.50%. With the eventual recovery likely to be extremely weak, monetary conditions will remain loose for longer than most seem to think.
  • Policymakers at the South African Reserve Bank (SARB) lowered their repo rate from 4.25% to 3.75% today, in line with our forecast and the consensus collected by Bloomberg. Today’s rate cut follows 200bp of cumulative easing in recent months. The South African rand was up against the US dollar on the news, suggesting that some investors were expecting more aggressive easing.
  • Similar to recent statements, the tone of today’s speech was particularly downbeat. Governor Lesetja Kganyago raised the prospect of the coronavirus returning in waves and holding back the economic recovery. The governor’s gloomy outlook for a slow rebound from a deep recession this year tallies with our view. The SARB expects GDP to fall by 7.0% this year, not far off from our forecast of a 6.5% contraction.
  • Subdued price pressures will keep the door open to further monetary easing. Headline inflation dropped below the 4.5% midpoint of the target range in March, to 4.1% y/y. We think that the slump in global oil prices will keep petrol inflation low, and weak demand will depress core inflation. (See Chart 1.) And Mr. Kganyago mostly emphasized downside risks to the inflation outlook.
  • Weak economic activity and muted inflation support the case for additional rate cuts, but we think that the easing cycle is unlikely to go much further. While today’s decision to cut rates was unanimous, policymakers were divided on its magnitude. Three (out of five) voted for a 50bp cut, while two supported a 25bp cut.
  • Today’s decision supports our view that the repo rate will end the year at 3.50%, after just one 25bp cut in July. (See Chart 2.) Policymakers will probably take a step back and leave rates unchanged throughout 2021 as the economic recovery remains slow. In contrast, markets have priced in rate hikes from the middle of next year. In other words, we think that monetary policy will remain looser for longer than most think.
  • What’s more, if the economic devastation caused by the coronavirus proves to be even worse than expected, we think that the SARB would jump into action again and extend its easing cycle.

Chart 1: Consumer Prices (% y/y)

Chart 2: Repo Rate (%)

Sources: Stats SA, SARB, Refinitiv, Capital Economics

Sources: SARB, Refinitiv, Capital Economics


Virág Fórizs, Africa Economist, virag.forizs@capitaleconomics.com