South African Reserve Bank has cut its key lending rate by 50 basis points from 4.25% to 3.75% the lowest on record. The Bank paints a grim picture of the economic outlook saying that getting back to pre-pandemic activity levels will take time.
In a statement Lesetja Kganyago, SARB Governor said that Q2 will experience the deepest economic shocks from coronavirus with gradual recoveries in Q3 and Q4 of 2020. The Bank expects South Africa’s GDP to contract by 7%, compared to the 6.1% contraction forecast in April. GDP is expected to grow by 3.8% in 2021 and by 2.9% in 2022.
In its May meeting, the Monetary Policy Committee said the coronavirus has caused extreme volatility in the financial asset prices with sharp market sell-offs. Current forecasts from the IMF show global gross domestic product (GDP) decreasing by about 3.0% this year.
Analysts predicted a slash in the central bank rate during the MPC meeting on Tuesday. Market-based expectations for short and medium-term inflation have fallen, while long-term inflation expectations remain higher.
The headline consumer price index (CPI) forecast averages 3.4% for 2020 with forecast core inflation at 3.5% in 2020. SARB notes that economic contraction and slow recovery will keep inflation below the target range of 3.8%.
Covid19 has major health, social, and economic impacts presenting challenges in forecasting the domestic economy. The Bank is certain that investment, exports, and imports will decline in the coming months with widespread job losses.
The Rand has depreciated by 22% against the US dollar since January and by 0.7% since the April MPC meeting.
Other monetary policy measures include easing of regulatory requirements on banks and ensuring adequate liquidity in domestic markets. The next statement of the Monetary Policy Committee will be released on 23 July 2020.