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Reserve Bank Expected To Cut Interest Rates Even Further On Thursday 23 July

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Reserve Bank Expected To Cut Interest Rates Even Further On Thursday 23 July

Consumer inflation in South Africa is currently at 2.1%, a 15-year low which is well below the 3% to 6% range that the South African Reserve Bank (SARB) is mandated to target. Low inflation at the moment is mainly a result of demand destruction. Retailers across the board have reported drastic declines in sales and consumer confidence has collapsed. This leaves the SARB, which has already cut rates by a whopping 275 basis points during 2020, plenty of scope to trim its key lending rate even further from 3.75% currently. The consensus is for a 25 basis point cut on 23 July 2020 when the Monetary Policy Committee (MPC) concludes its three-day meeting. 

One of the challenges confronting the MPC is the fact that the very significant cuts made so far during 2020 appear to have had limited effect.

The case for cutting is supported by economist expectations that the SARB likely now sees a bigger GDP contraction in 2020 than the 7% it previously forecast.

According to PwC economist Dr Christie Viljoen the Reserve Bank's forecast in May 2020 for a 7% recession this year was too conservative and that a revision to this number next week could see the SARB increase its forward guidance for more (or deeper) rate cuts in the short term. 

Things have indeed taken a drastic turn for the worse since the previous MPC meeting in May 2020. Even analysts who do not forecast a cut this time around concede one may be on the cards in light of the unprecedented nature of events. 

According to Jacques Nel, an analyst with NKC African Economics, the past few weeks have changed the equation quite a bit. Since the previous MPC meeting, we've learnt that consumer confidence has dropped to near all-time lows, we've seen the devastating impact that the lockdown has had on industry, we're again getting used to load shedding and stricter lockdown measures suggest the virus is far from under control. 

"We have previously argued that the current level of interest rates and expectations of increasing inflationary pressure would deter further interest rate cuts. This remains the case. However, we concede that another 25 basis points cut would not surprise, and would be typical of a time when unexpected developments have almost become the norm," Nel said.

One of the challenges confronting the MPC is the fact that the very significant cuts made so far during 2020 appear to have had limited effect.

Consumer confidence is at its lowest level since 1985 and business confidence is at historic lows - clear signs that households are hardly taking advantage of lower credit costs to embark on spending sprees. Inflation is slowing at a time when, in theory, it should be igniting, so it is hardly a concern at the moment.

Author Business Maverick
Published 20 Jul 2020 / Views -
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