South Africa Reserve Bank (SARB) has cut its repo rate for the fourth time by 25 basis points to 3.5% with effect from 24 July 2020. The MPC has cut interest rates by a cumulative total of 3.0 percent since the beginning of the year.
In January, the MPC cut the rate by 25 basis points in response to the recession recorded in the second half of 2019.
Upon the onset of COVID19, the MPC has announced three further rate cuts to cushion the ailing economy and counter the effects of negative growth. In March, the MPC cut the rate by 100 basis points to 5.25 percent. An emergency meeting in April cut the repo rate by 100 basis points while the May meeting cut the rate by 50 basis points to 3.75 percent. The latest MPC meeting announced a repo rate cut by 25 basis points to 3.5 percent.
South Africa’s terms of trade and commodity export prices remain high. The Brent crude oil price is expected to average about $40 per barrel in 2020, rising to $45 per barrel in 2021 and $50 per barrel in 2022.
However, financing conditions for emerging markets remain uncertain, contributing to currency weakness. The rand has depreciated by 15.2% against the USD since January and appreciated by 8.8% since the May meeting of the MPC.
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The lender expects the deepest contractions in GDP to occur in the second quarter of 2020, with gradual recoveries in the third and fourth quarters of the year. GDP growth is projected to contract by 7.3 percent in 2020 compared to 7.0 percent contraction forecast in May. SARB expects a rebound in 2021 with GDP growing by 3.7 percent while growth is 2022 is projected at 2.8 percent.
Even as the lockdown is relaxed in coming months, for the year as a whole, investment, exports and imports are expected to decline sharply. Job losses are also expected to rise further.
SARB predicts that the headline consumer price index (CPI) will average 3.4 percent year-on-year in 2020 is marginally lower than previously forecast at 4.3% in 2021 and 2022. The forecast for core inflation is lower at 3.3% in 2020, and remains broadly stable at 3.9% in 2021, and 4.1% in 2022.
The second quarter estimate for output has been revised lower. SARB expects the output gap to decline by -7 percent in 2020, -4.3 percent in 2021, and -2.8 percent in 2022.
The next statement of the Monetary Policy Committee will be released on 17 September 2020.