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Standard Bank Group
The SA Daily 21 November 2019

Cutting on an edge

  • Most EM and developed economies have eased rates this year due to slowing growth.
  • The South African Reserve Bank (SARB) too cut rates by 25 bps in July.
  • The SA economy has been in a downward phase of the business cycles since December 2013. Inflation has moderated to a recent low of 3.7% y/y in October, from 4.1% in September, on persistently subdued domestic demand.
  • Due to lower inflation, the SA spot real repo rate has risen; and, our inflation forecasts see real repo rate as remaining relatively elevated. This naturally would call for further easing; therefore, we’d expect a 25 bps cut today. However, monetary policy can only do so much. To boost growth, reforms must be implemented to clear structural growth bottlenecks and boost confidence as well as investment.
  • Arguably, the SARB’s thus far cautious approach to rate cuts, in responding to persistent domestic demand weakness and benign inflation outcomes that have been within the inflation target since April 2017, has been partly due to SA’s deteriorating fiscus and its prognosis as well as ratings since 2017 having been downgraded in the wake of various ill-advised reshuffles of cabinet.
  • SA now faces the real risk of losing its only remaining investment-grade rating by Moody’s. Today, the SARB will have to consider this particular risk when deciding on rates. Even should the bank cut rates today, we’d expect the SARB to keep rates steady thereafter.

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