interest rates SA Reserve Bank

Those South Africans in debt are set to face further pain later this week with interest rates wildly expected to be hiked. Photo: Supplied

Here’s why South Africa could soon have another interest rate cut

South Africa’s descent into recession and the surprise rate cut by the US Federal Reserve could see the Reserve Bank follow suit in mid-March.

interest rates SA Reserve Bank

Those South Africans in debt are set to face further pain later this week with interest rates wildly expected to be hiked. Photo: Supplied

A second interest rate cut in three months could be on the cards for South Africans. This comes in the wake of the unexpected decision by the US Federal Reserve on Tuesday 3 March to cut interest rates in an effort to stimulate the US economy, which is feeling the economic impact of the coronavirus outbreak.

South Africa’s economy is in a far worse situation that the American economy, with the confirmation by Stats SA that the country is now in its second recession in two years. 

South Africa’s last interest rate cut was in January 2020, when the Reserve Bank’s Monetary Policy Committee (MPC) decided to set the repo rate at 6.25%, a reduction of 0.25%. 

Worse-than-expected performance could bring the next rate cut forward

At the time, experts predicted a further rate cut in late year. However, this was based on a better economic performance than the paltry 0.2% growth rate confirmed by Stats SA on Tuesday.

“While the MPC’s projection model priced in only one more 25 basis-point cut in the fourth quarter of this year, easing could come sooner and be more aggressive, especially with rate cuts by the US Federal Reserve,” Bloomberg reported.

It also noted that MPC member Chris Loewald said in February the Reserve Bank would take into account the virus impact on the global economy at its next rate-setting meeting, which is scheduled for 17 to 19 March 2020.

“This will put pressure on the Reserve Bank to cut at the next meeting, especially as the oil price has tanked,” independent economist Elize Kruger told Bloomberg.

“A combination of lower inflation and growth forecasts will paint them in a bit or a corner, especially in terms of the global overlay and virus impact.”

Forward-rate agreements starting in one month fell 4.5 basis points to 6.31% and are now pricing in an 80% chance of a 25-point decrease in the repurchase rate when the MPC announces it decision on March 19.

Recession and US Fed decision put pressure on SA Reserve Bank

Similarly, the intermediary and advisory firm Exchange Capital commented that South Africa’s second recession in two years is “adding to pressure on the central bank to cut interest rates”.

Business Day agreed, saying the 0.5% rate cut by the US Federal Reserve “may intensify pressure on the Reserve Bank to do likewise to support an economy that was flagging even before the virus outbreak”.

In an editorial opinion column published on Wednesday 4 March 2020, Business Day commented:

“Expecting a cut from SA’s central bank is not an illogical response, though it’s hard to see what lasting difference a rate cut will make to a growth crisis that’s caused by supply-side constraints such as the lack of reliable electricity supply and policies that restrain competition in key sectors of the economy.”

It added: “With others set to follow the Fed’s cut, there is possibly room for the Bank to do likewise without risking a drop in the rand. While such a move could give the economy a ‘sugar rush’ and support consumer spending that is showing some resilience, in the longer term this won’t be a sufficient substitute for reforms.”

Commenting on the surprise 0.5% emergency rate cut by the US Fed, the Washington Post noted:

“The US central bank has not made a cut like this since late 2008, shortly after the collapse of Lehman Brothers. Fed leaders believed it was wise to move quickly as concerns mount about the plunging stock market and a severe disruption in every major economy.”

The newspaper added that recession fears in the United States have spiked in recent days.