SARB cautious, but still scope for further easing - Capital Economics
Africa Economics

SARB cautious, but still scope for further easing

Africa Economics Update
Written by William Jackson

Divisions on South Africa’s MPC suggest that some policymakers are keen for the easing cycle to be brought to an end following today’s 25bp cut (to 3.50%). And that seems to be the view priced into markets. Even so, with growth and inflation likely to be weaker than the Reserve Bank’s current forecasts, we still see scope for a few more rate cuts over the rest of this year.

  • Divisions on South Africa’s MPC suggest that some policymakers are keen for the easing cycle to be brought to an end following today’s 25bp cut (to 3.50%). And that seems to be the view priced into markets. Even so, with growth and inflation likely to be weaker than the Reserve Bank’s current forecasts, we still see scope for a few more rate cuts over the rest of this year.
  • Today’s decision means the Reserve Bank (SARB) has cut the repo rate by a cumulative 275bp since the coronavirus crisis escalated. Today’s move was correctly anticipated by the consensus, although we had predicted a larger rate cut of (50bp) – the same size as May’s move.
  • It’s clear that the balance on the MPC is becoming less dovish. Of the five MPC members, two voted for no change in rates. That was reflected in the language in the accompanying statement too. Whereas the risks to the inflation outlook were described as “to the downside” at the last meeting, this time they were described as “balanced”.
  • The MPC may also now think that monetary policy can’t do much more to loosen financial conditions and support the economic recovery. This statement noted the exceptional steepness of the yield curve, which it pinned on the government’s large financing needs. The implication seems to be that falls in longer-term rates are more likely to arise from the government’s actions than monetary policy.
  • While it’s clear from today’s meeting that the easing cycle is nearing an end, we don’t think this precludes additional easing. For one thing, the economic outlook remains pretty poor. We think GDP will contract by much more than the SARB’s forecast of 7.3% this year (our forecast is -11%). (See here.) Admittedly, the retail sales figures for May showed a sizeable rebound. But activity remains well below pre-Covid levels.
  • With the number of new cases of the coronavirus continuing to rise sharply, the government may need to re-introduce temporary and targeted lockdowns. (See here.) And the government is planning what appears to be quite severe fiscal austerity next year. (See here.) Both of these factors would hold back the recovery. (We will publish our updated forecasts with more details in our Africa Outlook next week.)
  • The weakness of the economy will also probably drag down core inflation and keep the headline rate lower than the SARB expects. (See our Update) We expect headline inflation to broadly hover around the lower bound of the SARB’s 3-6% target range over our forecast horizon. (See Chart 1.) The SARB’s forecasts, in contrast, see headline inflation averaging above 4% next year.
  • If we’re right on the growth and inflation outlook, we think there is some scope for rates to be lowered further. For now, we are sticking to our forecast for two additional 25bp rate cuts this year, to 3.00%. That also seems consistent with the SARB’s historic behaviour. (See here.) Financial markets were, prior to this decision, pricing in no change in rates for some time. (See Chart 2.)

Chart 1: Consumer Prices (% y/y)

Chart 2: Repo Rate (%)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


William Jackson, Chief Emerging Markets Economist, william.jackson@capitaleconomics.com